‘Cryptocurrency’ is a word often used in reference to ‘virtual currencies’. With the fast development of the world wide web and other technologies, cryptocurrency is becoming an increasingly popular method of transaction.
The value of some types of cryptocurrency has risen at such a rate that ‘bitcoin millionaires’ are becoming a norm. The surge in cryptocurrency income has been followed by an increased interest in how the virtual income is taxed.
Bitcoin is by far the most popular cryptocurrency, however there are over 1,000 alternative virtual currencies, such as Ethereum and Litecoins, which are becoming increasingly popular.
This article is used to define the current UK tax implications on Bitcoin activity and other crytocurrencies
Cryptocurrency is broadly treated as foreign currency for UK tax purposes. Where the value rises then that profit is deemed to be a foreign currency gain
From a legal perspective, Bitcoin/ cryptocurrency is not currently considered to be ‘money’ or ‘currency’.
Largely speaking, where cryptocurrency is exists for personal use as a means of currency, (to buy goods and services), there are no gains on exchange gains or any allowable losses. This is the same as when you buy currency for your holiday. You do not pay tax on any exchange gains, and are not allowed any losses on, on the fluctuations in the currencies.
VAT and CGT
VAT is payable on any exchange of cryptocurrency for goods and services.
Holding Cryptocurrency as a personal investment:
HMRC guidance states that:
The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable… For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.
Therefore whether your holding cryptocurrency for speculative (gambling) purposes or holding it as an investment with an intention of creating long-term appreciation determines if are subject to Capital Gains tax (CGT). If you are holding the cryptocurrency as an investment you fall within the capital gains regime and therefore will be subject to Capital Gains Tax for individuals and Trustees and corporation tax if a company.
Whether you are a speculative or investment cryptocurrency holder is determined by the HMRC case by case.
It can however my difficult to convince the HMRC that purchasing bitcoin was a ‘gamble’- even though the HMRC are not supposed to apply hindsight to their judgements.
Buying and selling Cryptocurrency
From a tax perspective, what constitutes a trading activity is an age-old issue, since there is no useful statutory definition. Whether a trade has happened or not may be judged off of case law.
The Badges of Trade was drawn together in 1955 y the Royal Commission of Taxation and Income based on previous case law decisions. These may be used by accountants, tax advisers and lawyers to determine whether a trade has happened.
An individual is likely to only be subject to capital gains on any return, while a company ‘s holdings are likely to be subject to corporation tax.
Mining of Cryptocurrency
The mining of cryptocurrency refers to acting to release new cryptocurrency into circulation.
Whether or not the ‘profits’ are taxable will depend on the organisation of the operations.
If the ‘miner’ is an individual who makes profit from what may be identified as a hobby, the tax implications are likely to vary from that of an individual/organisation that work full-time professionally, with specialised equipment where a definite trade has been performed.
If activities are identified as a trade then any profits that arise to an unincorporated business will be subject to income tax. If the profit arises from a company, the profit will be subject to corporation tax.