April 4th 2018 / BY: Wisteria

Taxation on Cryptocurrencies

Another month goes by and cryptocurrencies have still not gone away. The number of ads on the London Underground for the likes of cryptocurrency trading platforms which make it easier for you to understand continues to grow. Not only this, but as a formation agent, the number of calls and enquiries received on a daily basis claiming to have the next big crypto idea is more than you would imagine.

Although the rules regarding the taxation of cryptocurrency such as Bitcoin or Ethereum remains relatively new, here were try to debunk the myths and provide a guide as to what tax you (and your business) may face.

Background

As with many other types of commodities / currencies, you could be holding cryptocurrency with the view to one of the following:

  1. Personal use – i.e. you hold it to buy goods and services
  2. Speculatively as an investment
  3. Actively buying and selling as a trading activity.

The one additional category could be the mining of cryptocurrency.

 

How Is it taxed?

According to HMRC, the category of cryptocurrency is broadly being defined as foreign currency for UK tax purposes and this typically means that if the value appreciates, this profit will be deemed a foreign currency gain.

This differs from a legal perspective as cryptocurrency is not regarded as ‘money’ or ‘currency’ by the Bank of England or the European Central Bank.

As such, if there are gains on foreign currency (and cryptocurrency) in scenario (1) above, there will be no taxation implication in the UK. For scenario (2) however, any gains is likely to be subject to capital gains tax (CGT).

Special care will need to be taken when calculating the CGT due as specific matching rules will need to be followed as well as taking into consideration the annual exemption amount.

This CGT treatment is also likely to apply if the cryptocurrency was acquired as an investment from day 1. This differs from speculation (which is sometimes referred to as gambling) but there is a very fine line between the two cases of speculation and investment and therefore it is highly likely that HMRC would treat this on a case by case basis.

 

What is a ‘trade’

In some cases, HMRC may seek to tax cryptocurrency profits and gains to income tax rather than CGT. By doing so, a trader may suffer tax of up to 45% (excluding NICs) vs. the maximum CGT rate of 20%.

But what constitutes a trader? HMRC have a set guidance which is commonly referred to as ‘The Badges of Trade’. These set guidelines assist HMRC to be able to determine a taxpayers position as to whether they are a trader or not.

Broadly speaking, what HMRC look at are the following:

  • profit seeking motive
  • number of transactions
  • the nature of the assets
  • existence of similar trading transactions or interest
  • changes / modifications to the asset
  • the way the sale was carried out
  • the source to finance
  • time between purchase and sale
  • method of acquisition

HMRC will not look at each in isolation but usually bundle all of the items together to determine the trading position.

 

Am I a miner?

The mining of cryptocurrency tends to involve the purchasing of computer equipment and adding to the ‘blockchain’ space by adding / releasing new cryptocurrency into circulation. The actual process behind ‘mining’ is hugely complex and is far too techy for this article.

Broadly speaking, HMRC would seek to tax miners on the basis above, are they are trader, or is this just a hobby. Looking into the badges of trade again would be particularly key as to determining the taxation status of miners.

With the constantly changing environment surrounding cryptocurrency, it is important to keep well informed of the changes to taxation regarding cryptocurrency. As such, should you want to find out more about how the taxation of cryptocurrency traders and miners work and how this might affect you, then please speak with one of our taxation experts on 020 8429 9245 or email info@wisteria.co.uk.