16 May 2023
The Pepe coin seems to have kickstarted the crypto meme market into gear. We unravel the tax consequences for those who have hopped aboard the latest trend for fear of missing out.
In the latest crypto craze, a large number of Pepe memecoins have been given away for free in various competitions.
With airdrops (free crypto coins), if no service is required to receive them, the capital gains tax (CGT) base cost is nil and no income tax is due. If a service, like promoting the coin on social media or filling out a survey, was required then the value of the coins received would generally be liable to income tax. Initially, these coins were available at very low prices, leaving many people with a CGT base cost of effectively nil.
The high jump
At one stage the coins, despite having no practical utility, became immensely popular and the market capitalisation exploded to over $1.5bn on 5 May 2023. Some holders will have sold at that point, and hence realised substantial capital gains that will be liable to CGT, so they would be wise to make provision for future tax bills. If they have any crypto standing at a loss, this may be the tax year in which to realise it.
The real problem will be for people who came out at a high, then reinvested their proceeds in new cryptoassets that now stand at a loss. They will still face a large CGT bill, but the funds they would have used to pay this may have been largely lost. Whilst capital losses can be offset against gains, only losses realised in the same tax year, or unused losses brought forward from an earlier tax year, can be offset. As a result, if losses are realised in a later tax year, no tax relief would be available to set against the earlier gains, even if those gains have been exceeded by later losses.
To make matters worse, the annual CGT exemption was reduced from £12,300 to £6,000 from 6 April 2023, meaning that CGT is now payable if net gains exceed £6,000 in a tax year, subject to the availability of brought forward losses and any other reliefs.
Individuals that realised large gains at the top of the market need to review their overall tax position. If they continue to hold and do not otherwise dispose of their cryptoassets sitting at a loss in the same tax year, any losses they have made will not be available to mitigate the tax on the original gains. HMRC will not accept ‘sorry I lost the money’ as a reasonable excuse.
Cryptocurrency can be an exciting investment and it is clearly possible to make substantial gains, but it’s important to always keep an eye on the tax too. If you have a large gain, you will need to pay the tax at some point - if the proceeds have evaporated into the world of crypto, or you have spent them, a failure to take advice to mitigate the tax effect could leave you hopping mad.