Andrew Lockley – Exponential Investor (United Kingdom) –
Welcome back to the fifth and final part of my beginner’s guide to crypto investing.
Now, before we get started, I just want to highlight yet another massive mainstream adoption story.
Last week, the president of the European Central Bank (ECB), Mario Draghi, stated that European banks could start holding bitcoin in reserve.
Here’s what he said: “Recent developments, such as the listing of Bitcoin futures contracts by US exchanges, could lead European banks too to hold positions in bitcoin.”
First we have US senators and regulators giving ringing endorsements for crypto, and now we have the of the ECB saying major banks are looking at holding positions in bitcoin.
What a massive turnaround we’ve seen from official sources on cryptos in just a few weeks.
Despite the recent crash, 2018 is looking like it will be a monster year for cryptos. And if you’re reading this guide now, you’re well positioned to capitalise on it.
Okay, now back to the guide.
Today, we’re going to cover cashing out and tax.
It’s important to know about the possible tax implications, even if you never cash out back into GBP.
As I’ll discuss, every crypto-to-crypto trade counts as a taxable event. So if you were hoping you could get around paying your tax that way (as I once did), you were hoping wrong.
We’ll get to that in a second. First, the fun part.
How to cash out your cryptos back into GBP
The good news is cashing out is just as easy and, in most cases, just as fast as buying in.
The bad news is, you can’t just use Coinbase. You could, but you’d be paying big fees and getting a bad exchange rate.
When you cash out of Coinbase, it will convert your money to euros and then your bank will convert those euros back into GBP.
Your bank will typically give you a very bad exchange rate and will probably charge you fees on top as well.
So, the easiest way to cash out is just to use Coinfloor.
As I said in part four, Coinfloor is based in London. Its base currency is GBP. And it is one of the most legitimate exchanges out there.
Its withdrawal fee is a fairly low £10 flat rate and it also lets you cash out very large amounts.
The main issue with cashing out using Coinfloor is you’ll have to convert your cryptos to bitcoin first, as it doesn’t (yet) support Ethereum. Still, you’ll end up much better off than if you went down the Coinbase route.
Now, there is another way you can cash out, which will usually leave you better off. But it is more difficult and I’d only really recommend it for advanced users.
How to keep more of what you cash out (advanced method)
I was hesitant to include this method because it is very complicated and requires a good understanding of cryptos, exchanges and bank transfers.
But I know there will be some of you reading this guide who fit all that criteria, and I think it will help you get a better rate.
If you’re new, just go with Coinfloor. Skip this section and go straight to the taxes section. It’s not worth the ache this method will surely cause you.
If you’re still here, and that little disclaimer didn’t faze you, let’s begin.
What most people don’t realise about Coinbase is it’s just a user-friendly front end, stuck on top of a more advanced exchange: GDAX.
When you buy on Coinbase, you’re really buying through the GDAX exchange (they are the same company).
And you pay extra fees for the nice user experience of Coinbase – usually 1.5% to 4%. However, you can instead make your trades directly on GDAX and pay no fees.
Your login details are exactly the same.
The thing is, GDAX’s native currency is euros not GBP. So, this is where it gets complicated.
If you want to buy and sell Ethereum and bitcoin fee-free, you’ll need to deposit into your account, and withdraw from your account, in euros.
If you live in the UK this used to be difficult, or expensive, but it’s not any more.
All you need is a Revolut account.
Revolut is one of those upstart banks that’s been making lines in the last year or so. It runs on a phone app and offers currency conversion at the market rate. It also gives you a fully working euro bank account on the app.
So, you can top up your Revolut account from your normal bank account in GBP, trade your GBP to euros in Revolut and then send them directly to GDAX with a SEPA transfer.
Remember when I said this was the advanced method…
You can also do this the other way around.
So once you’ve made a small deposit from your Revolut euro account into your GDAX account, you can then withdraw in euros to your Revolut account, exchange the euros to GBP and then transfer them to your normal bank account.
All it will cost you is the 0.15 euro SEPA fee GDAX charges for euro withdrawals.
If you are withdrawing less than £25,000, and if you want the best possible rates, this is the way to go.
The advantages are that GDAX typically has better rates than Coinfloor, and you can use Ethereum.
The disadvantages are the amount of work involved on your part and the withdrawal limits.
Typically you can’t withdraw much over £10,000 a day from GDAX without making the case with it for why you should have higher limits.
And as a new user of Revolut, you’re limited to a £25,000 maximum transfer rate per year. Again, you can apply to have this £25,000 limit increased.
So, for ease of use, or if you’re withdrawing large amounts, Coinfloor is still a better choice. But it’s up to you.
Don’t try to outsmart HMRC – pay your taxes
Okay. So you’ve got in, made some good trades, seen your profits increase and now cashed out for a sizeable gain.
The only thing left to do, before you go spending all that money, is pay your taxes.
Familiarising yourself with the basic rules on crypto tax will save you a lot of heartache down the line.
I know this is not the most exciting part of the guide, but it’s potentially the most important.
I need to start by saying that I am not an accountant. I can’t give out specific tax advice. I can only report what HMRC makes public.
As you’re probably aware, tax is incredibly complicated. There are many clauses and exceptions to every rule, and people spend their entire lives trying to understand and exploit these clauses.
These people are called accountants. I am not an accountant. I can, however, give an overview of HMRC’s current rules on cryptos.
HMRC’s policies on crypto may surprise you, as they surprised me when I started looking into them.
Up until very recently there was a lot of confusion over if cryptos were even taxable or not. But over the last few months HMRC has made it quite clear any gains you make are subject to capital gains tax (CGT).
It doesn’t help that in the cryptocurrencies section of HMRC’s website it says this:
Depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not normally taxable and gambling losses cannot normally be offset against other taxable profits (CG12602).
It turns out that no cryptos are considered speculative enough to be tax exempt, not even initial coin offerings (ICOs).
I know this because I asked HMRC directly, as you can see in the conversation below.
(Click the pic for a bigger image)
Why HMRC even mentions that part about gambling on its site is beyond me.
Pretty soon, I imagine later this year, it will have to come out with new, clear guidelines that restate its position. For now…
Here’s what we know for the 2017/18 tax year
- You have an £11,300 CGT tax-free allowance.
As long as your profits are under this amount, you will not pay CGT on them.
(Bear in mind, I’m only taking into account crypto gains here. If you have other assets, this will affect your rates.)
- Every crypto-to-crypto trade counts as disposal of an asset and you’ll be taxed on your profit.
So, say you buy three Ethereum at £500 each, you have £1,500 of Ethereum.
Two months later those three Ethereum have doubled in price to £1,000. So you have £3,000 of Ethereum.
You then decide to trade one of your Ethereum, now worth £1,000, for some NEO.
This counts as disposal of an asset and is liable for CGT.
How much profit did you make from this disposal?
The one Ethereum you sold originally cost you £500, so you take this away from your sale price of £1,000, and you’re left with £500 profit.
It doesn’t matter you didn’t cash out into GBP, the values that are used are the GBP equivalent prices of the cryptos you traded on the day of the trade.
- CGT is charged at 10% for basic rate taxpayers and 20% for higher rate taxpayers.
So, let’s say you’re a basic rate taxpayer and you make a profit over the tax year of £15,000. How much tax will you owe?
£15,000 minus £11,300 (your CGT tax free allowance) = £3,700.
10% of £3,700 = £370.
You’ll owe £370 tax.
Had you been a higher rate taxpayer, you’d owe £740 (20% of £370).
Full crypto tax rules are more complicated than this
Please bear in mind, this is a very basic overview of how tax on cryptos works. It’s just meant to give you an idea, so you don’t end up with a nasty surprise come tax day.
There are many caveats, such as the “same day” rule and “bed and breakfasting” rule that you need to take into account.
If you’re looking for a more comprehensive overview of current crypto tax rules, you can have a look on cryptotax.uk.
I am in no way affiliated with that site. But throughout my research, I’ve found it to be one of the best places to get clear, current guidance on UK crypto tax.
How to record your trades so you know (roughly) how much tax you’ll owe
As you can see, it’s incredibly important to keep track of your trades. It will make working out your tax a lot easier, and on top of that it’s just good practice.
If you don’t make that may trades, you could just keep a record on a spreadsheet or even a Word document.
If, however, you’ve made quite a few, it gets more complicated.
When I first learned about the proper tax rules, I realised I was in big trouble. I had accounts with about six different exchanges and had made countless trades.
If you’re in a similar position, don’t fret, it’s actually very easy to automate everything.
Almost every exchange will let you export a complete history of your trades. Do this for every exchange you’ve used and save them. Remember, exchanges can go out of business, so you’ll want your own copy of your trades.
The whole process took me less than an hour to sort out from start to finish. And I have a very long trade history. It’ll probably take you even less time than this.
I have personally used bitcoin.tax and found it very straightforward. I am not affiliated with it, but knowing what I know now, I wouldn’t be without it.
Unfortunately it isn’t comprehensive enough to include some UK-specific rules on its calculations, but it is a voted for feature request. And it does work everything out for you in GBP.
I haven’t used cointracking.info myself, but I have heard good things.
If you’re making a lot of trades, I recommend using one of these services. Bitcoin.tax costs about £24 a year, but it could save you literally hundreds of hours of calculations.
Tracking your portfolio value on your phone
Okay, now back to the more fun parts of crypto: tracking your portfolio value.
The easiest way to keep track of your portfolio value is to use your phone.
I recommend using one of the services above to keep track of your profits/loss for tax, and using your phone for pure price tracking. Right now there are three good apps that let you do this.
This is the simplest of the three, and the easiest to use. You just search for your crypto, enter how much you have and the price you paid in GBP for it. CoinFolio then tracks the value for you.
It goes off the prices on coinmarketcap.com, so it’s pretty accurate.
This is probably the most popular crypto portfolio tracker out there. It’s somewhat harder to use than CoinFolio, but it is more accurate and has many more features.
To enter the prices in this one, you’ll need to know what your trade prices were, and which exchange you used.
Blockfolio is also good because it has a crypto news feed button that lets you follow stories from CoinDesk and Cointelegraph. It’s like a one-stop-shop for crypto info.
This app surged in popularity in late 2017, as Blockfolio struggled under the strain of so many users. It has many of the same features as Blockfolio and is a good alternative.
But be warned, once you can track all your cryptos on your phone, and refresh it every 30 seconds, you will. It’s incredibly addictive.
Okay, that’s it!
- What cryptos are and why they are so revolutionary
- The major players in each crypto category
- Buying and trading your chosen cryptos
- Cashing out your gains
- And even paying your taxes.
It’s been a long guide. But hopefully the knowledge you’re gained will eventually make you a whole lot of money, which will bring you a whole lot more freedom in your life.
You’re also now well versed on a technology that could, in all likelihood, have as big an impact on our lives as the internet has done.
That’s a bold claim. But given all you now know about cryptos, I hope you’d be inclined to agree.
By being in crypto now, you are part of something that is already changing the world. Not many people get to participate in something like this, they merely get carried along by it.
But not you.
When you look back in five or ten years, you’ll be able to say you were part of this movement from the beginning. And hopefully, you’ll have made a small fortune in the process.
Editor, Exponential Investor