Last Updated: 15 May 2021
Anyone interested in the cryptocurrency market has two ways to get in. Either one can invest or trade. This raises the question of personal preferences and financial goals. If you want to make a long-term profit, you should invest. Those looking for short-term profit should trade. Bitcoin Era is an automated trading software that allows you to trade cryptocurrencies. How are Bitcoin profits taxed in England?
According to Section 23 of the Income Tax Act, trading in cryptocurrencies is a private sale transaction. This is the case because cryptocurrencies are not legal tender in Germany. Bitcoin profits are consequently not treated for tax purposes like shares or other forms of investment. Under certain conditions, therefore, one does not have to pay taxes on Bitcoin profits.
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Step 1: Click on the link to go to Bitcoin Era’s official website.
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When are Bitcoin profits tax-free?
Two values are decisive here: the amount of the gain and the holding period of the currency, i.e. when the sale and purchase were processed.
In general, if you hold Bitcoins for more than one year, you do not have to pay tax on the gain when you sell them, regardless of the amount.
If bitcoins have been in your possession for less than one year at the time of sale, the amount of the gain is relevant. All profits up to 600EUR are tax-free. Beyond that, the entire amount, i.e. not just the difference between the profit and 600EUR, must be taxed.
In addition, the tax-free amount does not only include Bitcoin trading, but all private sales transactions. If, for example, you sell an antique for 800EUR, you have already exceeded the tax-free amount and must pay tax on Bitcoin gains.
The holding period: FIFO method
At first glance, it seems uncomplicated – bitcoin gains are tax-free from a holding period of one year. In practice, trading often turns out to be more complex, especially with regular purchases and sales within a year. According to the FIFO method (first in, first out), it is assumed that the Bitcoins that were bought first are also sold. For example, if you buy two bitcoins in January 2019, three in March 2019, and sell three bitcoins in February 2020, you are deemed to have sold two bitcoins from January 2019 and one from March 2019. The first two would thus be tax-free, and the profit from the sale of the third bitcoin would be tax-free as long as you do not exceed the 600EUR limit. To avoid confusion, you should neatly record all purchases and sales, including price and date.
The alternative LIFO method
The alternative LIFO method works on the opposite “last in, first out” principle – that is, first bought, first sold. Both methods can involve tax advantages or disadvantages, depending on the price trend on the cryptocurrency market. However, if you have opted for one of the two methods, you must also stick to this method in the next year.
The tax rate on Bitcoin profits varies depending on your personal income tax rate plus solidarity surcharge and possible church tax.