It’s been hard to avoid the talk of Bitcoin’s phenomenal surge in value in the past few months. On 1st January 2017, it hit $1,000 for the first time since it’s conception. On the 20th December 2017, it hit its all time high of $19,783 before falling back to end the year at around $13,700. Since then, Bitcoin, as well as a plethora of other established and newer cryptocurrencies, have gained a lot of attention as people look to them as a place to make some substantial investment gains.
Whilst 2018 looks to be a year that pushes the value and profile of these investments even further, the question many have asked of me is, are these gains going to be taxed and if so, how?
HMRC first set out their stance on cryptocurrencies back in March 2014 with the publication of Revenue & Customs Brief 2014 (9). Since then, they have remained largely silent on the topic.
VAT Treatment of Cryptocurrencies
As would have been expected, the buying and selling of cryptocurrencies are pretty much outside the scope of VAT. Services provided connected with trading in crytpocurrencies, such as consultancy services, will however be subject to VAT. HMRC also clarified that just because a transaction is settled in a cryptocurrency, this does not mean that the underlying supply is not subject to VAT. So buying goods and services using Bitcoin, doesn’t mean VAT shouldn’t be charged in the normal way. As with any other transaction, the £STG value is the equivilent of the market value of the cryptocurrency at the time of the transaction.
Corporation Tax, Income Tax and Capital Gains Tax
The taxation of profits from buying and selling cryptocurrencies is more than likely going to fall in to one of these three tax heads. In deciding which one, HMRC have said this must be considered on a case by case basis. For an individual to be subject to Income Tax (or a company to be subject to Corporation Tax) on cryptocurrency gains, there needs to be evidence of a trading business. To decide if this is the case, HMRC say that badges of trade must be present.
Not all of these “badges” need to be present in order for a trade to exist. It’s only when you look at all the badges that are present in the context of the activity that you can decide if you are trading in cryptocurrencies or investing in them.
So what does this all mean in practice? Put simply, if you are buying and selling numerous cryptocurrencies very frequently (in particular buying and selling the same cryptocurrency multiple times a day), you are potentially going to be deemed to be trading. If you buy cryptocurrency and hold on to it for a prolonged period, it’s more likely to be seen as an investment.
The biggest potential risk here (aside from the inherent risk in buying and selling any currency, commodity etc) is that some people will make vast amounts of profit from cryptocurrencies, have HMRC deem them to be trading, and end up being hit with the top rate of income tax on their earnings (currently 45% plus 2% National Insurance). At the higest rate of tax, individuals also lose their tax free personal allowance.
For this reason, it’s worth looking at your activity now, assessing the likelihood of being deemed to be trading, and if you are, consider moving your cryptocurrencies into a Limited Company where lower overall rates of tax apply. If the profits are in the company, some effective tax planning can make sure you hold on to more of your gains.
For those that are investing, as distinct from trading, in cryptocurrency, these gains will be subject to Capital Gains Tax (CGT). The good news here is that every individual has an annual exemption of £11,300 (for 2017/18 tax year). Any gains over and above that amount will be taxed at either 10% or 20% depending on your other income in that same tax year.
For the most part, I’d expect CGT to be the main tax applicable to gains from cryptocurrency but it will really depend on each individuals own circumstances. In fact, in some circumstances, HMRC have stated that there may in fact be NO tax due on gains from cryptocurrency.
Cryptocurrency – worth a gamble?
HMRC have already states that the taxation of cryptocurrency needs to be assessed on a case by case basis. And they have agreed that, in some circumstances, gains from cryptocurrencies may not be gains at all, but rather wins from gambling.
The logic behind this is that if the potential gain were so speculative and the individual bought in with an opportunity to both win and lose, the gains may be deemed to be more akin to gambling activity that investing. Winnings from gambling are specifically exempt from tax, therefore you may be able to make millions from cryptocurrency without being subject to any tax. Again, this will be looked at on a case by case basis, but I think it’s quite likely that a lot of gain from cryptocurrency will be put in the “gambling activity” box. Sounds great, right? Not always.
If the gains aren’t taxable…
So, not paying any tax on your gains from cryptocurrency might seems like the result you want. However, consider this. If a set of circumstances exist that mean your gains from crytocurrency aren’t taxable, the same circumstances will by default mean you losses won’t earn you any tax relief. It’s a double edged sword, and the main reason why I think HMRC may be remaining so quiet on cryptocurrency.
Let’s say you are in fact trading (per the above definition) in cryptocurrency. If you make a loss in any given year, you are entitled to carry that loss back to the previous tax year and offset it against your total income of that year. Assuming tax was paid in the previous year, you’ll be due a tax refund. HMRC don’t want to see an influx of tax refund claims and I think this is why the main message of their 2014 brief was “everything will be looked at on a case by case basis”. They want to see how things play out before refining their treatment of gains and losses from cryptocurrency. If they tax a gain on one taxpayer who has a particular set of circumstances, they will have to allow the losses of another taxpayer with the same circumstances. If they allow most gains to be deemed as winnings from gambling, then losses go the same route.
Sooner or later, the tax treatment will need to be refined and it may well take a handful of tribunals to get some generally accepted principles in place. Until then, my advice is to keep in close contact with your accountant if you make any significant gains. If you have any cryptocurrencies that have lost significant value and you don’t feel there is a realistic chance of them making a comeback, it may be prudent to sell those off at the same time you make a large gain. If you end up being liable to Income Tax, Corporation Tax or Capital Gains Tax, the losses will be offset against the gains and bring the overall tax liability down.
I expect 2018 to bring some clarity (and perhaps some controversy) to this topic. No doubt there were many that sold Bitcoin at $19,000 back in December having bought for next to nothing. It’ll be interesting to see how this plays out when it comes time to fill in a tax return (or not as the case may be).