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None of us want to pay more tax than we have to, and if there’s a way to avoid it most of us would jump at the chance.
With more and more people holding Bitcoin, Ethereum and other cryptocurrencies, the question of how to avoid Capital Gains Tax (CGT) on crypto is never more relevant.
The good news is, there are ways that you can legally avoid cryptocurrency taxes in the UK and keep more of the profits for yourself.
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On this page you’ll find details about:
- Do crypto exchanges report to HMRC?
- What is Capital Gains Tax and how much is your allowance?
- How can I avoid paying Capital Gains Tax on my crypto?
- Using your annual allowance
- Doubling your annual allowance
- Including your losses
- Deliberately selling crypto at a loss
- The bed and spouse strategy
- Selling either side of the tax year
- Donating to charity
- Moving abroad for five years
- Other ways of reducing Capital Gains Tax
- Will the Government change CGT rules?
Does Binance, Coinbase or other exchanges report to HMRC?
Before we get on to the ways in which you can cut your CGT Bill, we’ll answer a question that often crops up among crypto owners in the UK.
If you’re wondering whether HMRC knows about your crypto or if exchanges such as Binance or Coinbase report to them, be warned, this asset class is being scrutinised carefully by the taxman.
It’s unclear if Binance specifically reports to HMRC, but according to sources online exchanges such as Coinbase and eToro, to name a couple, have had letters requesting customer data.
In order to stay within the law, assume HMRC knows about your cryptocurrency and pay the necessary taxes when they’re due, otherwise you could face a hefty fine and a criminal record.
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What is Capital Gains Tax and how much is the annual allowance?
First, the basics about Capital Gains Tax and how it potentially impacts you when you sell crypto.
CGT is a tax you pay to HMRC when you make a profit on assets such as cryptocurrency, shares, second homes and many other investments.
In fact, pretty much anything you own worth more than £6,000 is liable for CGT when you sell it, aside from your car and your main home.
Other exemptions include gifts to your spouse, civil partner or a charity, and a small number of assets such as ISAs, Premium Bonds and prizes from betting or playing a lottery.
Each year you get a tax-free allowance (2021-22 – £12,300) meaning you’re only taxed on gains above this amount.
Once you’re breach this threshold and if you’re a higher rate taxpayer, you’ll be taxed at 28% on profits made by selling a second home and 20% on gains from other assets.
If you pay the basic rate, you’ll usually pay 18% on second home sale gains and 10% on profits from selling assets.
How can I avoid paying Capital Gains Tax on my crypto?
If you’re a UK resident and looking at ways of avoiding CGT tax on your crypto holdings, there are few things you can do to lessen the blow.
Note, these ways of mitigating CGT apply to individuals who hold crypto as a personal investment. Different rules apply if you’re an active trader, and additionally you may be liable for Income Tax.
1. Use your annual allowance. As we’ve detailed above, a certain amount of your crypto profit is tax free. This cannot be carried over to the following year so if you don’t use it, you lose it.
2. Double your annual allowance. By transferring crypto to a spouse or civil partner as a gift you can make use of their allowance as well. This effectively doubles the tax-free CGT amount on profits.
3. Include any losses in your calculation. Have you gambled on a new crypto and it’s tanked? Include this as a loss to cut your tax.
4. Deliberately sell your crypto at a loss. It may also be advantageous to deliberately sell crypto at a loss if it pushes you under the CGT allowance or reduces the amount of any gain CGT is due on.
5. The Bed and Spouse strategy. This a loophole in UK tax law that has yet to be closed and is different to the now defunct ‘Bed & Breakfast’ strategy on stocks. The way it works is that you of dispose of an asset such as crypto that’s gone up in value and use your tax-free allowance to cover any gain. Your spouse or civil partner then buys back the asset the next day and any future gain will be calculated using the higher repurchase price thus reducing any future CGT liability.
6. Sell your crypto either side of the tax year. This involves spreading your sale between April 5 and April 6 (the transition to the new tax year.) This way you avoid or reduce your CGT because you’ve traded in two tax-free periods. However, in the volatile world of cryptocurrencies, this can impact your profits.
7. Donating to charity. Donating assets and cash to charity increase your basic rate income tax at the top end meaning more of your CGT liability will be charged at the lower rate. Many charities now accept Bitcoin and cryptocurrency donations. This is also a useful strategy for reducing any Inheritance Tax liability as well.
8. Move abroad for five years. Anyone who is non-UK resident for five years or more will not pay CGT on the disposal of assets.
Related posts:
- How to avoid Inheritance Tax on cryptocurrency and other assets
- Do I have to pay Inheritance Tax on my Bitcoin and can it be inherited?
Other ways to reduce Capital Gains Tax on non-crypto assets
- Pay gains into a pension. Depending on your earnings, paying into a pension will reduce the CGT on a gain from 20% to 10% because pension contributions extend the higher end of your tax band by the amount of the contribution.
- Use an ISA. Any gains made inside an ISA wrapper, whether on cash or stocks and shares, is free from Capital Gains Tax. You’re allowed to invest up to £20,000 a year across all your ISA holdings.
- Bed and ISA. This is a similar strategy to Bed and Spouse and involves selling a non-cash asset then buying it back through your ISA meaning gains at a later stage will be tax free.
- Invest in small, high risk companies. If you put your cash into Enterprise Investment Schemes (EISs), Seed Enterprise Investment Schemes (SEIS) or Venture Capital Trust (VCTs) and leave it there for a minimum of three years, any gain is free from CGT.
- Lower your taxable income. As we have detailed above, the amount of CGT depends on the rate of tax you pay. If you’re a higher rate taxpayer there are several strategies you can use to decrease your taxable income and lower the amount of CGT you have to pay as a result.
- Hold-over relief or deferral. This is where you gift a taxable asset or sell it for below the market value, usually to a family member, and make a claim to defer payment of CGT on any gains made. This frees you from the tax liability and passes it on to the recipient of the asset.
- Chattels that are free from CGT. Certain collectible items that are classed as ‘wasting assets’, meaning they have an estimated useful lifespan of 50 years or less, are CGT-free. Vintage cars and other vehicles, together with antiques and collectibles may qualify.
Bear in mind that some of these methods to reduce CGT are not for the faint hearted and involve a substantial amount of risk.
The rules can also be complicated meaning it’s advisable to seek professional help to ensure you’re using the most efficient method of CGT reduction and that you stay within the rules.
Many people report their gains on an annual Self-Assessment tax return, although real-time reporting to HMRC is possible.
Is the Government planning to overhaul the CGT rules?
This is a distinct possibility and may include a reduction in the annual tax-free allowance, among other changes.
While nothing has been confirmed at the time of writing, it’s worth considering your current financial situation and how it may be affected by a harsher CGT tax regime.
Related post: Do I have to pay Capital Gains Tax on my cryptocurrency?
