Astonishing, isn’t it? Bitcoin reached its peak in December 2017 closing at nearly $20,000 (roughly £15,230) having been valued at closer to $3,000 (roughly £2,285) in July that year – just five months before. At time of writing, seven months later, the price has dropped by two thirds.
Bitcoin and other cryptocurrencies are new forms of electronic money completely free of government control. They are created through a process called “mining” during which an incredibly powerful computer solves quadrillions of cryptologic puzzles. The prizes for this are the cryptocurrency itself and tokens. People and businesses keep their bitcoins in an electronic wallet and they are free to buy and sell currency from each other. Each transaction is recorded onto something called a “blockchain”, a kind of (allegedly) tamper-proof ledger.
During the peak in December 2017, various financial commentators reported that Bitcoin now represented the biggest bubble in financial history, even bigger than the housing bubble, the South Sea bubble, the dot com bubble, and even Tulipmania.
So, what is the current situation on tax for Bitcoin and cryptocurrencies?
The answer is “confused but guessable” through both HMRC precedent and through their existing guidelines. In this article, The Financial Management Centre takes you through the world of bitcoin and cryptocurrency taxation.
Can this Be a trade?
If you are a crypto miner or a crypto trader, you will pay income tax and National Insurance on your gains as a sole trader or corporation tax if you’re using a limited company structure.
Let’s say that you mined £1m worth of Bitcoin and it cost you £800,000 to mine those Bitcoins. Your taxable profit or income would be £200,000.
Alternatively, you could be a trader either online or you could own and operate a collection of Bitcoin ATMs (there are currently around 100 of them in the UK).
With both of these business models, you would pay tax on the gain you made from your line of business (mining or exchange for a commission).
While you have the Bitcoins in your possession, their value may rise and when you come to sell those Bitcoins (either to convert into GBP or into another form of crypto), you would pay tax on the profit made on those cryptos for the time you held them. The profit would only appear on your books when your investment “crystallised” – in other words, the day on which you sold them. You would not have to pay tax on any rise in value if you did not sell the crypto in your possession. Likewise, you could not claim for any financial losses against income tax/NI or corporation tax until the point of crystallisation.
HMRC apply “badges of trade” tests in order to determine whether what a person or a company does is a trade – click here for their guidance. Cryptocurrency miners must make a substantial investment in both equipment and electricity to carry out business so they would be likely to succeed in an appeal.
However, if you are a crypto trader using a sole trader structure, you may have to prove that what you’re doing is actually a business and not a hobby or gambling. If they believe it’s a trade, then you will pay tax on your activities plus any rise in the value of your crypto assets and you’ll also be able to claim losses. If they believe it’s gambling or a hobby, you will pay no tax on your gains but receive no tax relief on your losses.
For limited companies, the chances are that HMRC will always consider cryptocurrency trading as an investment particularly if your company’s actual line of business is something different.
Is Bitcoin/Cryprcurrency an investment?
If you claim to HMRC that you or your company have bought cryptocurrency as an investment on which you wish to make a return, any profit you make would be treated as a chargeable gain upon crystallisation.
Sole traders would pay Capital Gains Tax on the chargeable gain and limited companies would pay Corporation Tax. As with miners and traders, you could not claim for any financial losses against income tax/NI or corporation tax until the point of crystallisation.
Bitcoin and VAT
On buying, selling, converting, or converting a cryptocurrency to GBP or any other currency, no VAT will be payable.
If you’re a miner, you will be able to claim input VAT back on your activities, particularly your energy bills.
If you’re VAT registered and you sell a product or service in crypto, then the output VAT you charge will be the GBP equivalent at the time the transaction takes place.
CrYptocurrency and inheritance tax
Cryptocurrency is likely to be treated as just another other asset class for inheritance tax. Inheritance tax is a complicated area and we invite you to contact one of our experts here at The Financial Management Centre to help you plan.
Tax law on cryptocurrencies is evolving all the time. In the very near future, further evolution in the tax treatment of cryptocurrencies is likely to occur via Tribunal rulings as opposed to statutory law.
In December 2017, HMRC announced that it wished to start regulating crypto because it was concerned about its potential for use in money laundering. There has been no further word since.
For any involvement you’ve had in crypto, whether it resulted in a loss or a profit, please take to us before you make any declaration to HMRC. There is so much uncertainty out there that, without professional advice, the danger of making a mistake on a declaration is high and we all know that HMRC does not like mistakes. Please get in touch with us.