George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Bitcoin gains? Don’t forget that the taxman will want his share

HMRC must be rubbing its hands in glee. With Bitcoin values soaring to record levels, sooner or later the taxman will be collecting his share of gains made from this cryptocurrency, and from the hundreds of others following in the wake of Bitcoin.

So how does taxation of cryptocurrencies work in the UK?

It all depends on how you acquired your Bitcoins. Most users will have simply paid for the Bitcoins in their digital wallets. Using Bitcoin’s own verification and transaction software, users can exchange Bitcoins for traditional currencies, goods or services. However, some special users, generally referred to as miners, amalgamate and verify transactions for others. Miners receive Bitcoins for this service, along with any transaction fees offered by the parties.

Taking a simplistic view, gains may be realised by ordinary users who acquired Bitcoins as investments when they exchange the cryptocurrency for traditional currencies, goods or services. The gains will generally be taxed as capital gains. For individuals, those gains will be subject to capital gains tax. For corporate users, the chargeable gains will be taxed at corporation tax rates.

For miners and other Bitcoin owners who buy and sell regularly as Bitcoin traders, their profits and gains will be chargeable to income tax for individuals, and to corporation tax for companies. The normal tax rules applicable to trading will apply for this purpose. It’s important to note that the taxable profit may be based on the value of the Bitcoins rather than on the proceeds of sales which have been made. This means that tax may be payable before the cash proceeds of sale are available to pay the tax bill.

So much for the direct taxes. What about VAT? HMRC treats coin-mining activities as falling outside the scope of VAT. Activities other than mining are exempt from VAT. Similarly, the sales of Bitcoins or any other cryptocurrency are not liable to VAT; nor are any fees or commissions earned from arranging or carrying out cryptocurrency transactions.

If you’ve followed me this far, you will be coming to the conclusion that the tax rules are fairly straightforward although the computations may be messy and you might need help to complete them. Predictably, the key message for individual Bitcoin sellers is to remember to include any gain on your tax return!

Now for the sting in the tail.

HMRC’s guidance makes it clear that any transaction using cryptocurrencies must be looked at on a case-by-case basis, taking into account the specific facts. HMRC goes on to illustrate this with the example of speculative transactions that may not be taxable because they are much more akin to gambling or betting. As is well known, in the UK gambling or betting wins by ordinary punters are not taxable. And gambling losses cannot be set against other taxable income or gains.

So, there we have it. HMRC will use existing tax law to tax the profits of cryptocurrency activity.

But if the Bitcoin bubble bursts and owners incur huge losses, don’t bank on HMRC coming to the rescue with tax relief for those losses. Instead, we may well see HMRC contending that the transactions were so speculative that they were more like betting or gambling with the result that no tax relief will be available for losses.

You have been warned!

For more information, please comment below or get in touch with George Bull.

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