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The end of July saw a resurgence in the value Bitcoin and other cryptocurrencies off the back of various influences including the movement of assets into gold and other precious metals to safeguard wealth against the precarious economic uncertainty and the US banking regulator OCC giving national banks the green-light to offer custodial services over crypto assets.
With the surge in prices, individuals need to be careful to consider the affect of their actions at such a sensitive time. Cryptocurrencies have surged and crashed on multiple occasions since 2016 and this can result in significant gains and losses.
The key issue taxpayers need to be aware of is that the act of exchanging and diversifying crypto portfolios is a taxable event, crystallising any gains to that date. This can be particularly problematic at the height of Crypto prices.
As such, taxpayers will also need to consider ensuring that they have sufficient funds, or will have sufficient funds, available to settle their tax bill.
We have assisted a number of clients who have been in the precarious position of holding cryptocurrencies for a number of years and diversifying their portfolio’s at the peak of the 2017 boom. By diversifying their portfolios and exchanging long-held Bitcoin and Ethereum for alt-coins, they had crystallised a tax liability on the significant increases in value realised in 2017.
By the time prices fell and levelled out, many individuals were left with a significant tax liability based on record highs with a diversified portfolio sitting at a modest value. Failure to ‘cash out’ at the peak to make reserves for the tax bill has resulted in many of our clients liquidated the vast majority of their portfolio in order to settle the bill with HMRC.
John had invested £3,000 to acquire 100 BTC in 2016 – following the surge in prices at the end of 2017, John’s 100 BTC was worth a staggering £1,400,000.
John decided that in an attempt to minimise his risk, he should exchange his BTC for a diversified portfolio of crypto – by exchanging BTC for other crypto, John had crystallised his gain of £1,397,000 which resulted in a Capital Gains Tax (“CGT”) liability of up to £279,400.
In January 2019, John’s portfolio is worth just shy of £300,000 and did not retain funds to settle his tax liability. As such, John will be required to liquidate most of his portfolio in order to comply with his tax obligations and keep the tax man at bay.
Although selling off his portfolio would likely crystallise capital losses, these cannot be carried back and offset against a tax liability for earlier tax years.
This may seem like an extreme example – however, this is the scenario that a number of our clients have found themselves in. Although, the fluctuations in value are not as extreme as those seen in 2017, they still remain significant and individuals should bare the tax consequences of the activities in mind, particular where there has been a recent surge or fall in the value of crypto.
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We are experienced in helping to advise crypto investors, traders and crypto-based business in structuring and planning their affairs to help ensure they optimise their position.
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