In the absence of any more detailed guidance from HMRC, the conventional wisdom surrounding cryptocurrencies is that they are treated in much the same way as shares for the purposes of calculating capital gains tax.
Whilst in principle the method by which gains on shares are calculated is the same as for any chargeable asset, this does mean that cryptocurrencies are subject to slightly more complex rules in certain cases, and none more so than the so called 30 day ‘bed and breakfast’ rules, which apply to gains and losses on all assets which are ‘pooled’, but are more stringent with regard to shares.
History of the rule
The 30 day bed and breakfast rules were brought in as a way to mitigate the lost revenue made by HMRC when investors sold and repurchased shares around the end of the tax year. Each year, they would dispose of a number of shares before the year end, using up their annual exempt amount, before repurchasing the shares shortly after the year end, thereby ‘re-basing’ the cost of the shares, and spreading the gains over a number of years, effectively reducing the tax they paid on fluctuations in value.
Operation of the rule
The rule works by calculating an interim gain or loss made on the time in which the shares were not in the investor’s possession, which depends upon the value of the shares at each interval. The formula for calculating the gain or loss can be summarised as:
Whether this results in a gain or a loss is dependent upon the fluctuations in value of the shares:
Say for example you held 100 shares with a value of £1, and sold them for £1.50, before repurchasing for £2:
Here, the initial sales of £1.50 x £100 actually result in a loss, as the increase in the value of the shares during the interim period means that the £150 proceeds will buy you fewer shares (£150/£2 = 75) when you come to repurchase.
Now let’s say that, rather than increasing in value, the shares drop to £1.00 when it comes to repurchase:
In this case, the decrease in cost of shares means you are able to purchase more with the proceeds of the initial sale, which HMRC wants to be treated as a gain.
Implications for Cryptocurrencies
When applying these rules to cryptocurrencies, the rules operate in exactly the same way (though the calculations will look uglier due to the likely decimalisation involved). Two key aspects to bear in mind, however:
- The rules do not apply for transactions that occur on the same day (these are covered by separate ‘same day’ rules to match assets purchased and sold on the same day, even if the purchase happens after the sale).
- The rules only apply for sale and repurchase of identical assets, and so can be avoided entirely if the proceeds from a currency sale are reinvested in a different currency.