Crypto Currency: Tax Guide
Crypto Currencies have exploded in popularity and are currently receiving a huge amount of attention. If you’re using Bitcoins in your business, you may want to read up about the tax implications. In this short guide we’ll give you the lowdown on Cryptos and Tax.
What is a Bitcoin?
The Bitcoin is an innovative payment network and a new kind of money. Bitcoin is a form of digital currency that uses peer to peer technology to operate with no central authority or banks.
‘Bitcoin is seen as the world’s first decentralised digital currency, otherwise known as a “crypto currency”. The advent of crypto currencies such as bitcoin is a new and evolving area and determining their legal and regulatory status is ongoing.
Despite these subtle differences, it acts in a manner similar to a regular currency: you can exchange your money for Bitcoins, and vice versa, in much the same way you do when travelling overseas. You can exchange Bitcoins by using either an exchange or by trading directly with another individual. Once you’ve purchased your Bitcoins, they’re stored in an electronic wallet, ready for you to spend. Similarly, people can purchase goods and services from you by transferring Bitcoins from their wallet to yours.
Tax implications on Bitcoin Trading.
VAT on Bitcoins
Buying and selling Bitcoins, and any commission payable on the exchange, is exempt from VAT. However, regular VAT rules remain when you’re supplying goods and services in return for Bitcoin. In this case, you must calculate and charge VAT on the sterling value of the Bitcoin at the time the transaction takes place. For example (based on the exchange rate when this article was written) if you raise an invoice for 1.3BTC (BTC means Bitcoin), you must calculate VAT on a value of £457.
Income tax on Bitcoins
As an individual tax payer, you do not pay income tax on exchange rate profits from personally held Bitcoins: instead they are subject to capital gains tax.
Capital gains tax on Bitcoins
If you personally buy and sell Bitcoins, the gain (or loss) is subject to capital gains tax, and is calculated using regular capital gains calculations. For example, if you purchased 5BTC for £2,285 and later sold them for £3,185, your capital gain is £900. If your total gains, minus losses, exceeds your annual tax-free allowance (currently £11,000) then you must pay capital gains tax on the gain.
The business of bitcoin (bitcoin mining)
The guidance continues by stating:
‘Corporation tax – the profits or losses on exchange movements between currencies are taxable. For the tax treatment of virtual currencies, the general rules on foreign exchange and loan relationships apply.’
‘Income tax – the profits and losses of a non-incorporated business on bitcoin transactions must be reflected in their accounts and will be taxable on normal IT rules.’
‘Chargeable gains: corporate tax and capital gains tax – if a profit or loss on a currency contract is not within trading profits or otherwise within the loan relationship rules, it would normally be taxable as a chargeable gain or allowable as a loss for CT or CGT purposes.’
Speculative bitcoin activity
The guidance continues further:
‘Depending on the facts, a transaction may be so highly speculative that it is not taxable, nor any losses recorded relievable. For example, gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.’
Gambling is ordinarily outside the scope of tax and so this ‘tax free’ treatment will follow with bitcoin activity.
In the UK, the guidance given by HMRC is that a trading activity will continue to be assessed on the basis of preparing profit and loss accounts to determine taxable profits; and the value of goods or services bought or sold using virtual currencies must still be accounted for at their market value or the exchange value of the virtual currency converted into UK pound sterling.
This is clear for an existing trader, but an individual holding bitcoin or other virtual currency may not be sure whether their investment or holding is taxable or whether the losses are allowable. If speculating on the coins increasing in value, it may be that this activity is seen as akin to gambling; and if HMRC agree there would be no tax due on wins, but no relief for losses either. If the virtual currency is held with the intention to create long-term wealth, then this is more in the nature of investment and the gain or loss on disposal or sale would be more likely to come into charge to tax as a capital gain. HMRC tell us that whether or not a profit or gain is chargeable, or loss-allowable, will be assessed case by case. Prospective investors should take advice on whether their activities would constitute a trade before they embark on.
The activity of bitcoin has to be embraced and understood by tax advisers from the outset. Loss claims cannot be just ‘processed’ by tax advisers. The whole motive, subject matter and circumstances of realisation have to be examined. It is essential that there is evidence to support all claims. Any bitcoin operation has to be looked at on a ‘case by case’ basis, as do all sideways loss claims, which have to be dealt with on a ‘loss by loss’ basis. All loss claims must be supported by evidence and business plans.
Please give Moneytree Financial a call or email to see how they can help.