Posted on 10 May 2018
Simon Littlejohns, Head of Tax at Birmingham based Friend Partnership Limited takes a look at the tax treatment of cryptocurrencies such as Bitcoin.
I have had several clients asking me recently about Bitcoin and other cryptocurrencies, and how any profits and losses should be dealt with for tax purposes.
This is a developing area, and the Government and HMRC are struggling to catch up with the progress in this virtual market.
At present the cryptocurrency market is unregulated with transactions that are virtually – no pun intended – untraceable and undertaken by individuals and companies who can remain anonymous. These features make the market ideal for those undertaking illegal activity and those who perhaps wish to evade paying tax.
However, many taxpayers, who have no illegal intentions, may come unstuck because they do not appreciate the need to pay tax on the profits they may generate. The onus is on the taxpayer to make the necessary disclosures and pay the tax.
HMRC has no access to information on who holds the virtual ‘wallets’, or on who is undertaking the transactions. This must be contrasted with the position with a normal bank account, where banks will provide details to the tax collection authorities in the UK and other jurisdictions, making bank transactions more visible.
As an aside, it is interesting to note that some countries – Finland and Sweden for example, do not recognise Bitcoin and other cryptocurrencies as legal tender. In the UK, customers of the Lloyds Banking Group are not able to buy Bitcoin and other cryptocurrencies on their Lloyds credit card.
Some have argued that Bitcoin activity, due to the volatility of the market, is gambling and therefore not a taxable activity. Cryptocurrency trading however is not gambling – tax must be considered.
The most important aspect of dealing with taxation is keeping the records to support the tax return entries – take a screenshot or download any relevant CSV files at regular intervals or when trades are completed.
The tax treatment of Bitcoin and other cryptocurrencies
For companies, the profits and losses on cryptocurrency transactions will be subject to tax in accordance with the foreign exchange and loan relationship rules.
Individuals will be subject to capital gains tax on capital gains or income tax on trading profits depending on the facts. This is where problems are likely to arise, with individuals unaware of the need to report activity and whether that activity is on capital or revenue account.
A profit on a one-off speculative transaction will be treated as a capital gain.
If the capital gain exceeds the current annual exemption of £11,700, then tax will be payable.
Even if the capital gain does not exceed £11,700, detail must be reported to HMRC if the total proceeds in the tax year are more than £46,800 (i.e.: £11,700 x 4).
However, for many individuals, the profits they generate will be subject to income tax because they are carrying on a trade.
The question of whether or not the cryptocurrency transactions amount to a trade will be determined by HMRC referring to the standard ‘badges of trade’, the more important of which are:
- Frequency of transactions
- Size of transactions
- How the transactions were conducted
- Time between purchase and sale
If a trading activity is being undertaken, the tax payable could be up to 45% of the profits. This is compared with a maximum 20% tax rate on capital gains.
Individuals using bitcoins and other cryptocurrencies must think carefully about their tax obligations and remember the following:
- Keep records
- Declare any profits
- If not registered for self-assessment – register
- Keep an eye on the business press for changes to the tax rules in this developing area