Capital gains tax is a bit more complex than the income tax. It arises any time you dispose of the crypto. For the tax purposes, disposal means “getting rid” of your crypto by any of the following means:
- sell crypto for fiat currency;
: you buy Coin A for £3000 and later sell it for £4000. You'll need to pay tax on the resulting £1000 gain.
- swap, trade, exchange one coin to another;
: You bought 1 Coin A for £2000. You exchange 1 Coin A for 10 Coins B. The market value of 10 Coins B is £3000 at the moment. Since initially you paid £2000 to acquire Coin A, you use the following equation: £3000 - £2000 = £1000, which is your Capital gain for the tax purposes.
- use crypto to buy goods and services;
- gift crypto to anyone except for your spouse or civil partner. From tax perspective, gift is considered a disposal and thus triggers CGT under similar rules with other transactions.
CGT arises when any of the above events happen. However you may get a gain or loss as a result. If you have a gain – you may pay tax on it. If you have a loss – not only you don’t need to pay tax, but rather you can reduce your tax burden.
The gain equals to the difference between the amount you sold the assets for and the amount you paid for them. If the asset was acquired for free, you shall take the market value of the asset at the date of acquisition.
Next thing to consider is a tax-free allowance which constitutes £12,300 for the tax year 2022 – 2023. This means that you have to pay the capital gains tax only if your overall gains are above this threshold.