I found an article recently in terms of cryptocurrency and taxation. Now it may be old news to you but to the less financially informed maybe not so. Please note: The article applies to the US.
Last year was ugly for cryptocurrencies.
“Even before the demise of the FTX and other cryptocurrency exchanges that have since declared bankruptcy, crypto was stressed. For many investors, the FTX scandal capped a disastrous 2022 that prompted them to cut their losses in cryptocurrencies like Bitcoin and Ethereum. As tax season rolls in, you may wonder if you can deduct those losses against any capital gains you notched during the year. Or if you were lucky enough to earn money from investing in crypto or crypto-related assets, you may be asking if you have to report it to the Internal Revenue Service?“
This gave me pause for thought so I looked at Gibraltar and UK regulations, lo and behold I found an answer. Enjoy the read below which I am sure is not extensive BUT will set you on the path to enlightenment.
When you dispose of cryptoasset exchange tokens (known as cryptocurrency), you may need to pay Capital Gains Tax. You pay Capital Gains Tax when your gains from selling certain assets go over the tax-free allowance. You might need to pay other taxes if you receive cryptoassets.
When to check
You might need to pay Capital Gains Tax when you:
- sell your tokens
- exchange your tokens for a different type of cryptoasset
- use your tokens to pay for goods or services
- give away your tokens to another person (unless it’s a gift to your spouse or civil partner)
If you donate tokens to charity, you may need to pay Capital Gains Tax on them.
Work out if you need to pay
To check if you need to pay Capital Gains Tax, you need to work out your gain for each transaction you make. The way you work out your gain is different if you sell tokens within 30 days of buying them.
Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset was free, you’ll need to use the market value when working out your gain.
You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you’ve received them.
You can deduct certain allowable costs, including a proportion of the pooled cost of your tokens when working out your gain.
You can also use capital losses to reduce your gain, but you’ll need to report them to HMRC first.
If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.
What counts as an allowable cost
You can deduct certain allowable costs when working out your gain, including the cost of:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a buyer or seller
- drawing up a contract for the transaction
- making a valuation so you can work out your gain for that transaction
You can also deduct a proportion of the pooled cost of your tokens.
You cannot deduct costs:
- you’ve already deducted against profits for Income Tax
- of mining activities (like equipment or electricity)
Pool the cost of your tokens
You must group each type of token you own into pools and work out a pooled cost for each type.
You pool the cost of your tokens in the same way you pool costs for shares.
When you sell tokens from a pool, you can deduct an equivalent proportion of the pooled cost (along with any other allowable costs) to reduce your gain.
Working out the pooled cost is different if there has been a hard fork in the blockchain.
You’ll need to work out the pooled cost every time you buy or sell tokens.
When you buy tokens, add the amount you paid for them to the appropriate pool. When you sell them, deduct an equivalent proportion of the pooled cost from the pool.
You must keep records for each pool.
If you buy and sell tokens of the same type
Do not group tokens into pools if you buy them:
- on the same day that you sell tokens of the same type
- within 30 days of selling tokens of the same type
If you bought new tokens of the same type within 30 days of selling your old ones, the rules for working out the cost are the same as the rules for shares.
How to report and pay
If you need to report and pay Capital Gains Tax, you can either:
- complete a Self Assessment tax return at the end of the tax year
- use the Capital Gains Tax real time service to report it straight away
The amount of tax due might be different if you are not a resident in the UK.
If you complete a tax return, you must complete it in pound sterling.
Records you must keep
You must keep separate records for each transaction, including:
- type of tokens
- date you disposed of them
- number of tokens you’ve disposed of
- number of tokens you have left
- value of the tokens in pound sterling
- bank statements and wallet addresses
- a record of the pooled costs before and after you disposed of them
You may also want to keep other records such as wallet addresses.
HMRC might ask to see your records if they carry out a compliance check.
Information courtesy of HMRC however please don’t assume and check your own situation with the Gibraltar Tax Office.