Bitcoin, CGT and Average Cost Basis

Bajjo

Hi,

The last 12 months have been good for Bitcoin and I'm selling some to realise some gains and make the most of my CGT allowance before the new financial year.

I have some simple questions (with fictional details) relating to average cost basis, imagine this situation:

John owns 100 bitcoin, bought for £20,000 so an average cost basis of £200/coin.

There are a number of bitcoin gambling sites where one can gamble bitcoin and winnings are paid in bitcoin.

How does a 10 bitcoin gambling profit (made at £500/coin) affect John's average cost basis?

If John lost the bet, how would a 10 bitcoin gambling loss, also at £500/coin, affect his average cost basis?

And finally, what if John first wins 10 bitcoin gambling, then 2 months later loses 10 bitcoin gambling (assume both at £500/coin)?

Assume the gambling sites are legal and licenced in the UK. Although I would be interested to know how it would affect things (if at all) if they were not.

Many thanks,

Bajjo

chrismac1

Not sure about bitcoin and CGT. But gambling profits and losses are outwith the UK tax system. This differs from many countries in the world, such as USA and Austrailia, so only applies to UK tax residents for the purposes of this post.

Bajjo

Thanks for the reply.

As for the CGT status of bitcoin - HMRC consider it a currency - gains or losses apply as normal for capital gains tax.

Yes, the UK has no tax on gambling winnings. But if I win one bitcoin when the price is £500/coin, then I hold on to that coin and sell once the price has risen to £800, surely I have a capital gain of £300 which goes towards my CGT allowance?

What I want to find out is how gambling winnings and losses with bitcoin affect my average cost basis for CGT reasons.

Should I consider every winning bet a bitcoin purchase at market value? How do I account losses?

Bajjo

How about this for anyone that can't get their head round Bitcoin, it's basically the same question:

I live in the UK and haven't been to the USA but I did move £66,666.67 into USD and received $100,000 in May 2016.

In June I gambled $75,000 on Remain and lost it, leaving me with $25,000.

In November I gambled my final $25,000 on Trump and won $75,000 putting me back to where I started at $100,000.

I exchanged my $100,000 back into GBP in Jan 2017 and got £80,000!

That looks like a £13,333.33 capital gain... but is it?

LeedsPete

The revenue don't charge tax on gambling winnings therefore no relief is due on the losses.

It like be pointless in the UK to tax gambling as there would be no revenue gained by the treasury. They'd just make a loss from the people employed to collect and calculate the money owed from one person and then pay that same money back out to the person on the other side of the bet.

It's pretty easy to legally avoid quite large amounts of CGT by combining your allowance with gifting. After that you can obviously realise all your losses in the same year cutting the amount of CGT owed.

Then you simply rebuy in to the trades you exited with your losses wiped out. You can dive a coach and horses through CGT. The only reason it doesn't get scrapped is because your average man in the street would see it as another tax break for the rich at the expense of the poor when in reality most people know how to get around paying the tax.

booksurr

LeedsPete wrote: »

in reality most people know how to get around paying the tax.

please post real life examples to support your claim

Bajjo

Look, another example:

I gamble 100 bitcoins which have risen in market value by £60,000 since I purchased them.

I lose the bet.

Do I have to report a capital gain of £60,000 and pay CGT on £48,900?

I have spoken to an accountant who says I would, because when I place the bet it is deemed that I have converted the bitcoins into GBP and realised a gain. Even if I bet in bitcoin, not GBP.

So despite losing 100 bitcoins, I would still owe CGT of about £9,000.

Is this right?

The gambling doesn't matter. Yes, there is no tax on gambling winnings and no relief on losses BUT the placing the bet (the transaction) is where the gain is realised.

jamesd

Phone HMRC and discuss it with them.

The accountant is correct that the bet placing was a disposal of the asset. That part is easy.

The exchange rate part isn't so easy.

To start, read Capital Gains Tax: Foreign Currency Bank Accounts which explains that exchange rate gains on money in foreign bank accounts are not taxable under CGT, nor are losses allowable deductions. I assume that you held your bitcoin in an account, you need to discuss with HMRC whether it's included in this.

For interest purposes, with lots of payments involved, I discussed my situation with HMRC and they told me that I could pick any reasonable exchange rate basis so long as I was consistent. Annual, monthly, daily, all OK, just be consistent. CGT isn't interest but this is another reason to ask HMRC.

If it is considered to be a bank account, you might not only save yourself the CGT but also the need to do any CGT reporting.

But, is the bet an asset? That is, are you potentially liable on gains between the date you placed the bet and the date of the event you were betting on? I think not, but confirm with HMRC.


On your next tax return I suggest that you summarise the guidance you get from HMRC so that they are aware of it and have another opportunity to disagree or accept it.

TempUserName123

Just to add, the "bet" is not an asset, but simply a contract.

The trade could be laid off at betting exchanges such as Smarkets or Betfair. The bet is simply a market position.

sarah.dixon

I've been in a similar situation. Bitcoin absolutely gets stung with CGT.