By Tsering Namgyal
Ahead of a halving of the UK capital gains tax allowance on 6th April 2023 from £12300 to £6000 on 6 April 2023, tax advisory firm Andersen have claimed that many UK crypto investors are unaware of the tax implications involved with trading between certain crypto assets.
UK crypto investors have been able to make £12,300 of gains tax-free each year. However, from 6 April 2023 this will fall to only £6,000 and fall again from 6 April 2024 to only £3,000. These changes will mean more investors will need to declare their gains. From 6 April 2024, the UK self-assessment tax return forms will require individuals to report their disposed crypto assets separately in the capital gains page.
Despite publishing tax guidance, Her Majesty’s Revenue and Customs (HMRC) found that 37 per cent of people knew “little”, while more than one in five were “not familiar at all” with their crypto capital gains tax requirements. These statistics are in line with the understanding from tax advisory firm Andersen:
“The majority of daily trades on crypto exchanges are not fiat-to-crypto but rather buying and selling stablecoins for other cryptoassets. Through working with crypto investors, we’ve found that many are surprised to learn that trading from one stablecoin or cryptocurrency to another creates a taxable event, even if no money is withdrawn.
Despite this, the use of US dollar-pegged stablecoins remains dominant amongst UK crypto investors. This leads to more complicated tax returns as foreign exchange conversions occur at a higher rate. If UK Investors use GBP-denominated stablecoins, they can help mitigate the exchange fluctuation risk associated with USD pegged stablecoins.” – Laura Knight, Andersen
Andersen LLP gave the example scenarios below to illustrate their point.
Mr X has no crypto assets and decides to deposit £10,000 onto an exchange on 6 April 2022. In this first scenario, Mr X then purchases 13,000 USDT. Then on 6 September 20X2, Mr X trades the 13,000 USDT for 10 Ethereum (ETH). Due to the dollar strengthening against the pound, the 13,000 USDT is now valued at £11,500 on this date.
As this is a crypto-to-crypto transaction, it is a taxable event and Mr X has a capital gain of £1,500 from the foreign exchange movement relating to this transaction. This is despite not withdrawing any funds from the exchange.
Mr X decided to purchase a GBP-denominated stablecoin, such as GBPT, with the £10,000 funds instead. On 16 September 20X2, Mr X trades 10,000 GBPT for 10 ETH, which is still valued at £10,000.
Like the first scenario, this trade would create a taxable event. However, since there is no foreign exchange movement, Mr X has not created a tax liability in relation to this transaction.
Due to the inevitable exchange rate movements, Andersen explains there will, almost certainly, be gains or losses created when dollar stablecoins are traded for another crypto asset. Native stablecoins like GBPT, issued by Poundtoken, could be a way for UK investors to reduce their risk of additional liabilities arising from foreign currency fluctuation.
About the author
Tsering Namgyal is the chief content officer of NFTMetta.com.