You would have to be living under a rock not to have heard about cryptocurrencies, of which the most famous is Bitcoin. Many have put their toe into the water via a speculative purchase, in hopes that the recent soaring of values will continue. Many will not have yet cashed in any gains. But when they do, the taxman will expect to be paid. Here’s how it works.
UK taxation of Cryptocurrencies
You probably paid for a Bitcoin (or more) using your digital wallet. And then you left it there, looking for a capital gain. Until recently there have been few outlets for you to use this new form of currency to buy goods and services, but this is changing. If you do so, any increase in the value of the Bitcoin that you have realised is also regarded as a capital gain. This is likely to give rise to tricky recording and reporting issues.
You may also be aware that there is a category of Bitcoin users who are known as ‘miners’. They amalgamate coins and carry out transaction verifications. In return they may earn transaction fees as well as free Bitcoins.
- HMRC levies capital gains tax on individuals who enjoy a Bitcoin gain;
- It levies corporation tax on corporate bodies who do likewise;
- In the cases of regular cryptocurrency traders and miners, all profits or gains will be taxed as income tax;
- Once again, companies who trade regularly in this way, buying and selling, are charged corporation tax.
If you sell Bitcoins the tax is payable on their actual value; and if you have not yet received the cash for them you may be out of pocket.
Just as if you buy a foreign currency, VAT is not chargeable. This applies whether you are a simple user of Bitcoins or you are involved in mining them. Commission and fee payments are likewise not liable to VAT.
Made a Loss? You are on your own…
If you are reassuring yourself that any loss on these highly volatile currencies can be set off against tax, think again. Whereas HMRC says it will consider each case individually, its default position is that such transactions are speculations, or to put it another way, gambling.
Betting is now tax-free in the UK, as a result of all the revenue that was previously flowing to offshore locations to avoid the old gambling taxes. And whereas HMRC will not tax your winnings, it does not therefore take kindly to cushioning your losses. There is no offset against any tax if you lose a bet.
What goes up must eventually come down: so if you are tempted by the cryptocurrency bubble, then beware the fallout when there is a downturn. You are likely to be exposed in full.
In summary, the existing tax laws will be used to cover this new phenomenon: but there will be no relief to cushion any future blows.
If you need help with keeping on top of your trading gains and losses from cryptocurrencies and the taxes due, as well as recording them on your tax return, then contact us at Odiri Tax Consultants on 01733808075