- If you dispose of any crypto assets that you hold,
then there is likely to be capital gains implication
if you're here in the UK, USA, Canada, Australia.
In fact, almost everywhere in the world.
But what exactly is a capital gains tax for crypto assets?
This is what I'll help you understand simply
and in under five minutes.
So in a vast majority of cases,
if you're a crypto investor, trader,
or even a sophisticated trader,
you will pay capital gains tax on any profits.
That is gains in capital gains tax language.
When you dispose of your crypto.
So what exactly is a disposal,
also known as a taxable disposal?
Simply put if you carry out one of these
four acts with your crypto,
then you could be liable to a taxable disposal.
Number one is selling your crypto for fiat currency.
That is US Dollars, GBP, Aussie Dollars.
I think you get the picture.
Number two is exchanging one crypto for another.
That is non-identical crypto, like Bitcoin for Ethereum.
Number three is buying good and services
directly with your crypto.
Number four is gifting crypto.
So what exactly is capital gains tax for crypto assets?
Well, first thing is first.
There's no such thing as a specific capital gains tax
for crypto assets in itself.
You see, most tax agencies around the world,
that's including HMRC in the UK, the IRS in the USA,
classifying crypto assets as property.
So they class it all together.
And therefore, as the name suggests,
capital gains tax is a tax on capital gains.
Capital is wealth that crypto assets
that is used to make more wealth,
and again, is an increase in the value of that wealth.
And the opposite can actually occur.
A loss is a decrease in the value of a wealth.
See, capital gains tax has applied to assets
such as stocks and shares,
residential and commercial property investments,
art, collectibles, just to name a few for absolutely years.
Remember, the following three things
have to apply in order to trigger
a disposal for capital gains tax purposes.
Number one, you need to a taxable person.
Number two, you need to have disposed of a taxable asset.
And number three, you have to have made a taxable disposal.
Now, if you're an individual investor or trader of crypto,
then you, depending on where you are a resident
in the world for tax purposes, you are the taxable person.
Crypto assets are taxable assets.
And finally, I've already listed out the four most common
taxable disposal or disposition events.
So how exactly do you calculate capital gains tax
on a taxable gain?
In very basic terms, a chargeable asset is sold
for more than the purchase price,
then a capital gain arises.
And remember, you're only liable to pay capital gains tax
on any gains you make and not on the gross proceeds itself.
So let's look at a quick example.
So Roger bought five Ethereum
on the 1st of January 2022 for $10,000.
Pricing each Ethereum at $2,000.
The exchange he used charged him $200 in transaction fees
that allowed his Ethereum to be included
on the distributed ledger block chain.
His cost base is therefore $10,200.
If you wanna learn more about cost base,
the different methods, lifo, fifo, hifo,
average cost base methods,
watch my course in the description box below.
On the 7th of March, the market value of Ethereum increased
to $18,000, that is $3,600 per Ethereum.
He's now sitting on a $7,800 realized gain.
And no tax is actually due on this yet
as he has not triggered a disposal.
On the 10th of March, Roger decides
to sell all five Ethereum coins he holds
at the market rate of $18,000.
And this is exactly the fiat amount that he receives.
And in return, he has now triggered a disposable event
that is subject to capital gains tax.
How much capital gains tax Roger actually pays
depends upon where he is tax resident.
If he were a UK resident,
then he would either pay 10% or 20% on the $7,800.
Or the GBP equivalent of it.
Depending on his total income in the tax year.
And this is after a capital gains tax allowance of £12,300.
If he were a US citizen or tax resident
then given that given this is a short term capital gain,
in other words, under 12 months,
then according to the 2022 federal income tax rates,
he would be subject to anywhere between 12% and 37%
on this $7,800, dependent upon how much ordinary income
he actually earned in the tax year.
And yes, you can make taxable losses too, I know.
How on earth does that work?
Keep watching, and I'll explain simply, very shortly.
So what are the current CGT rates at the moment?
Well capital gains tax rates vary from country to country
and from one financial year to another.
Here in my home country, the UK,
the key rate applicable to crypto assets are
if you are a basic rate income tax payer,
then 10% of capital gains tax applies.
And if you are a higher or upper rate income tax payer,
then 20% capital gains tax applies on any crypto gains.
And if you're a U.S. citizen or tax resident,
then capital gains tax rates are split into short-term,
that is 12 months or less,
and long term, which is greater than 12 months.
Short term rates are in line with ordinary income tax rates
starting from 10% all the way up to 37%.
And long-term rates are known as preferable rates,
they start from 0% to 15% up to a cap of 20%.
And if you want to know the CGT rate in your country,
in 2022, then download this handy guide
by clicking on the link in the description box below.
Yes, I hear you ask the question
"what if you're making losses in a beer market?"
And this can happen, as we know in beer markets
you may be sitting on what's called unrealized losses.
That is when the value of your crypto asset is actually less
than it's base cost.
And if you dispose of your crypto and realize a loss,
then unfortunately from an investor perspective,
you have lost value.
But from a tax perspective, you can use these losses
to reduce your overall or future tax bills.
Losses can either be used in the current year
to offset against any gains, therefore reducing net gains.
And/or any unused losses can be carried forward
to future years with no expiry date.
And this is pretty much applicable in the UK, USA,
Canada, Australia, and many other countries across the world
and if you're in the USA, you can actually even use
up to $3,000 of capital losses and offset this
against ordinary income in the current tax year.
Now, that's a bit of a smart way to avoid taxes legally.
But here's the thing about avoiding taxes.
It can be quite a fine line sometimes in the crypto space
between that and evading taxes.
One being legal, and the other one not.
And whilst you all will illegally minimize your tax bills,
you certainly don't wanna be breaking the rules.
Which is why this next video will 2X your understanding
on the differences between tax avoidance and tax evasion.
And potentially stop you from being audited or investigated
by a home tax agency.