HMRC defines crypto assets as: “cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically”. The various ‘tokens’ that have been created including Bitcoin, Litecoin, and Ether are all virtual, they exist only on computer servers.
The tax law hasn’t been written to cope with crypto assets, but that doesn’t mean the profits made on investing in crypto are tax-free. HMRC expects most individuals who buy and sell crypto assets to be treated as investors rather than traders, so any gains or losses are subject to capital gains tax (CGT).
Every time a crypto asset is bought, sold, lent, or ‘staked’, this creates a capital transaction. Crypto sales need to be matched with crypto purchases to calculate the profit or loss. This can be a total pain when a taxpayer makes hundreds or thousands of transactions in a year.
The advantage of capital gains treatment for crypto is that you can set your CGT annual exempt amount (£12,300) against any crypto asset profits made in the tax year if you haven’t used that exemption elsewhere. But, be aware that this CGT exemption will drop to £6,000 for 2023/24 and will be cut again to £3,000 for 2024/25.
Many crypto assets investors will have seen the value of their assets drop or even disappear over the last few months with the collapse of one of the largest crypto exchanges in the world: FTX Trading Ltd.
If you have sold crypto assets at a loss, or the assets are no longer worth anything at all, you may be able to claim a capital loss for the assets becoming of ‘negligible value’. These losses must be claimed on your tax return before they can be used.
Unfortunately, capital losses cannot be carried back to set against capital gains realized in an earlier tax year, except where the loss arises in the year of death. You can carry the capital losses forward to use against future capital gains – made on any type of asset.