Taxation of Bitcoin and other Cryptocurrencies
UPDATE: HMRC policy paper published 20 December 2018
HMRC’s policy paper on cryptoassets for individuals confirms that HMRC does not consider the buying and selling of cryptoassets to be the same as gambling, and therefore gains on the sale of cryptocurrencies will not be exempted from tax.
Taxation of Bitcoin and other Cryptocurrencies (originally published 21 December 2017)
At the time of writing, Bitcoin is currently trading at over £12,500 to 1BTC after its much publicised appreciation in the past year. Many Bitcoin holders may therefore be considering the tax implications of selling their holdings now.
The short answer is: it depends on the facts of each case. But there is guidance on what taxes may and may not be chargeable depending upon each taxpayer’s circumstances.
The regulatory environment for cryptocurrencies is still developing but HMRC’s latest guidance is contained in HMRC Brief 9/14.
HMRC have stated that, depending on the facts of the case, the sale of cryptocurrencies can either be:
- Exempt from tax,
- Subject to income tax, or
- Subject to capital gains tax.
Bitcoins held through companies may also be liable to corporation tax however this article focuses on individual holders of cryptocurrencies.
Exempt from tax
Winnings from gambling and lotteries are normally exempt from tax on the basis that the transaction is so highly speculative. Equally, losses are also not allowable as deductions against other gains or income.
Transactions with certain cryptocurrencies may reach the threshold of speculation such that that any gains or losses are outside the scope of tax entirely. The more established and larger the cryptocurrency, the harder this treatment will be to justify.
Alternatively, transactions in cryptocurrencies can amount to a ‘trade’ in which case any profits would be subject to the taxpayer’s marginal rate of income tax (20/40/45% in 2017/18) after deducting their unused personal allowance (up to £11,500 in 2017/18).
Loss relief claims against other income may also be available in the event of a trading loss on cryptocurrencies.
The ‘badges of trade’ tests are the criteria by which something is judged to be a trade or not and we’ve discussed these badges in our previous blog here.
Capital Gains Tax (CGT)
If not taxed as a trade, any cryptocurrency gains may still be subject to CGT as an investment activity.
Cryptocurrency gains would be subject to the taxpayer’s marginal rate of CGT (10/20% in 2017/18) after deducting their unused annual exempt amount for CGT (up to £11,300 in 2017/18).
Losses arising from cryptocurrencies could also be offset against other current year gains or future gains, depending on how the losses arise.
Value Added Tax (VAT)
HMRC has made clear that no VAT is payable on cryptocurrencies. This includes buying and selling such currencies, exchanging them for other currencies, income from ‘mining’, etc.
If you have any questions about the tax implications of selling cryptocurrencies then please get in touch with one of our tax consultants.