Gifting is a common thing that people do on different occasions to show their love and appreciation for their friends and family. With the evolution of cryptocurrency, there is a new way to gift: crypto gift cards. According to His Majesty Revenue and Customs’s (HMRC’s) guidelines on crypto taxation, you might be liable to pay tax on crypto gifting in UK
What Is Crypto Gifting?
Crypto gifting is the practice of giving cryptocurrency as a gift. It can be done in several ways, such as by sending cryptocurrency directly to the recipient’s wallet address, purchasing a crypto gift card, or giving them physical tokens holding a certain amount of cryptocurrency.
Crypto Gifts Taxation in the UK
In the UK, gifting crypto now attracts a capital gain tax because it involves transferring crypto from one person to another. The only difference is nothing is received in return (no currency, no goods, no services, not even another type of crypto). Here’s a detailed guide on how crypto gifts are taxed in the UK:
Gifting Crypto To A Friend
Gifting cryptocurrency to a friend can be an exciting way to share your investment journey. However, UK investors should know the tax implications of such transactions. When you give crypto to someone other than your spouse or civil partner, you must determine the market value of the crypto on the day you make the gift. This value will serve as the sales proceeds for Capital Gains Tax (CGT) purposes.
It’s crucial to note that if you have already paid income tax on the tokens you are gifting, you can benefit from section 37 of the Taxation of the Capital Gains Tax Act 1992. This provision allows you to reduce the “sales proceeds” by the amount previously subject to income tax. Consequently, the remaining value will then be liable for CGT.
To ensure compliance, keep accurate records of the crypto’s market value on the gifting date and any taxes previously paid. By doing so, you can make the process smoother and avoid unexpected tax liabilities.
Gifting Crypto To Your Spouse Or A Civil Partner
Gifting cryptocurrency to your spouse or civil partner in the UK comes with significant tax advantages. You can transfer any amount of crypto without incurring Capital Gains Tax (CGT). This means there is no limit on the value you can gift, making it a strategic way to manage your investments.
Utilising this tax-free gift allowance allows couples to maximise their individual CGT exemptions. Each person in a household has their own annual CGT allowance, which can reduce the overall tax burden. Additionally, if your spouse or partner falls into a lower Income Tax band, it could further decrease your CGT liability when they sell the gifted crypto.
Gifting Crypto To A Registered Charity
Donating cryptocurrency to a registered charity in the UK offers significant tax benefits. When you give crypto to charity, you don’t have to pay tax on the donation amount, making it a financially savvy choice for investors. You can also claim Income Tax relief, which effectively reduces your taxable income.
Additionally, donating crypto allows you to avoid Capital Gains Tax, a major advantage for crypto holders. However, two key exceptions exist. If you sell your crypto to a charity for more than what you originally paid, you must pay CGT on the profit. This calculation is based on the difference between your selling price and your acquisition cost, not the market value at the time of donation.
Moreover, be cautious about “tainted donations.” This term describes situations where you arrange to receive a financial advantage or kickback from the charity. Such arrangements could nullify the tax benefits you’d typically enjoy from donating crypto.d
Receiving Crypto As A Gift
Receiving cryptocurrency as a gift can be an exciting experience for UK investors. It’s important to know that simply receiving crypto does not trigger any immediate tax liabilities. This means you don’t have to worry about taxes at the moment you receive your digital assets.
However, the situation changes when you decide to sell or dispose of the crypto later. At that point, you need to consider capital gains tax. The key aspect here is that the market value of the cryptocurrency on the date you received it will be considered your acquisition cost. This value plays a significant role in calculating potential gains when selling the crypto.
How To Calculate Tax On Crypto Gifts In UK?
When gifting cryptocurrency, understanding the tax implications is crucial for UK investors. The UK treats crypto gifts as disposals for tax purposes. This means you must calculate any capital gains or losses resulting from the gift.
To determine your capital gain or loss, use the formula
Capital Gain/ (Loss) = Disposal price – Cost basis
Cost basis = Cost of the Crypto + Allowable Expense (like transaction fee)
Real Life Scenarios
Case 1:
Alex gifts 1 BTC as a gift to his friend Bob. The value of 1 BTC was £30,000 when purchased. On the day of gifting, the value went up to £37,000. Here, Alex will have a tax implication on the gift made in the guise of a notional sale.
Tax liability for Alex is:
Taxable value = Sale value – cost basis
= £ 37000 – £30000
= £7,000
Since the CGT allowance is £6,000, there won’t be any tax liability on £6,000.
On the balance, a £1,000 – 10% rate is applicable.
Final tax liability = £100
Case 2:
Alex gifts 1 BTC to his wife. The value of 1 BTC is £30,000. What is the tax implication?
Here, Alex will not be attracting any tax as the gift is made to his spouse.
Conclusion
The tax treatment of crypto gifting in the UK is relatively straightforward. Gifting crypto to a spouse or civil partner is tax-free, as is donating crypto to a registered charity. However, giving crypto to anyone else is considered a taxable disposal, and you will be liable for CGT on any gains you have incurred at the time of gifting. It is essential to record all crypto gifting transactions for tax purposes.
Feeling overwhelmed by the process of calculating and managing your crypto taxes in the UK? Fret not, because KoinX is your reliable solution. Utilize KoinX’s services to effortlessly generate a detailed crypto tax report. This report will provide you with valuable insights into your tax liabilities, helping you stay informed and compliant.
Frequently Asked Questions
What Is The Definition Of Spouse As Per HMRC?
According to HMRC, when crypto assets are transferred between spouses, the transaction is treated as a ‘no-gain and no-loss’ disposal, meaning it’s tax-free. For this exception to apply, the individuals must be married or in a civil partnership and living together during the tax year. This provision helps minimise tax liabilities for couples.
Can You Claim A Loss On A Crypto Gift To A Connected Party?
If you incur a capital loss when gifting crypto to a connected party, you cannot offset it against other capital gains. This situation is known as a ‘clogged loss.’ The loss can only be applied against future gains from disposals to that same connected party in the same tax year or later.
What Is A Connected Party As Per HMRC?
HMRC defines a connected party in capital gains as your spouse or civil partner, relatives (like siblings and descendants), their spouses, and the trustees of any settlement where you or someone connected is a settler. Additionally, it includes anyone you partner with and their relatives, as well as companies you control directly or with others.
Can HMRC Track My Crypto Gifts?
Yes, HMRC can track your crypto gifts. They employ various methods, including blockchain analysis and data sharing with exchanges. If you gift crypto, it’s essential to keep thorough records and report any relevant transactions accurately. Transparency is crucial to ensure compliance with tax regulations and avoid potential penalties.
