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Can I owe more tax on cryptocurrencies than the value of my current portfolio?
Can I owe more tax on cryptocurrencies than the value of my current portfolio?

How much tax do I owe on cryptocurrency investments? Can tax on cryptocurrencies be higher than current portfolio value?

Daniel Howitt avatar
Written by Daniel Howitt
Updated over a week ago

Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.

Although this may seem nonsensical, due to the way cryptocurrencies are taxed and the volatility of the cryptocurrency markets, this has happened many times before. The way it usually happens is as follows:

  1. An investor purchased bitcoin when it was at a low price, let’s say they bought 5 bitcoin at £1,000 each in April 2017

  2. The investor held the bitcoin until it increased tremendously in price. They then heard about smart contracts on the ethereum blockchain, so they wanted to invest in ethereum. They exchanged their 5 bitcoin for 100 ethereum tokens when bitcoin cost £10,000 per token and ethereum cost £500 per token in December 2017

  3. This means the investor has made a taxable gain of £9,000 per bitcoin (£45,000 total)

  4. The investor believes in the long-term value of ethereum, so decides to hold the tokens for the foreseeable future.

  5. Fast forward to December 2018. The investor is calculating their tax return for the 2017/2018 tax year, for which the deadline to submit is January 31st, 2019. The ethereum has decreased in price tremendously to £70 per token, meaning the investor’s portfolio is currently worth £7000.

  6. When calculating the capital gains tax owed to HMRC, the investor has £45,000 in cryptocurrency capital gains. He also has other capital gains from selling a rental property, so has already exceeded the £12,000 capital gains exemption.

  7. As the investor is a high-earning individual, they fall into the 20% capital gains tax bracket. Therefore, the tax to pay on the £45,000 from disposing of their bitcoin is £9,000. The current value of the ethereum they hold is £7000. Therefore, their portfolio is worth £2,000 less than their taxable gain for that tax year.

  8. There is a silver lining however. The investor now has an unrealised loss on his ethereum investment of £43,000. If the investor were to sell their ethereum tokens now and realise this loss (as long as they didn’t rebuy any ethereum within the 30 day bed and breakfasting period) they will be able to use the £43,000 capital loss in their 2018/2019 tax return to offset any gains in that year and also save that loss to offset other future capital gains.

Although this is quite a simplified scenario, similar ones have occurred. Due to the way the cryptocurrency market has performed in recent years and how the tax years fall, it is much more common than people would expect. 

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