How do you tax Bitcoin? Are cryptocurrency or cryptoasset gains or profits, taxable? Can you obtain tax relief if you make losses on Bitcoin? How do you tax Ethereum profits? Gains on transactions in cryptoassets, of which Bitcoin is a cryptocurrency, are potentially taxable in the same way as other investments. 

At a glance

What's new?

In December 2018 HMRC published guidance on the taxation of cryptoassets for individuals. This was updated in November 2019. HMRC confirms that:

  • Most individual investors will be subject to CGT on gains and losses.
  • S104 pooling applies for individuals, subject to the 30-day rule for 'bed and breakfasting'. Different pooling rules apply for businesses.
  • It will be rare for investing in cryptoassets to be regarded as trading, although 'mining' is likely to indicate a trading activity.
  • Other tax treatments (rather than trading or investment) may need to be considered by companies such as loan relationships and the intangibles rules.
  • A capital loss may be claimed in the event that a cryptoasset becomes of negligible value. Evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
  • Exchange tokens such as bitcoin are located for tax purposes where ever the beneficial owner is resident.  
  • VAT may need to be considered.

In October 2018 the Cryptoassets Taskforce, consisting of HM Treasury, the Financial Conduct Authority and the Bank of England, published its Final Report. This provides an overview of cryptoassets and Distributed Ledger Technology (DLT), assesses the associated risks and potential benefits and sets out the path forward with respect to regulation in the UK.

Tax was outside the Taskforce’s remit.

What is a cryptoasset or cryptocurrency?

There many different types of cryptoassets. So-called 'cryptocurrencies ' are just one variation. 

Many people will have heard of Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin and perhaps Stellar, Tether or Eos. There are thousands of new forms of cryptoassets which are less currency-like and can have other attributes. These attributes can make them a form of token and tradable on different platforms worldwide.

Overview and examples

What is a cryptoasset or cryptocurrency?

A cryptocurrency shares many similarities with other currencies.

  • You have fluctuating exchange rates which are driven by the market.
  • You can buy and sell the currency in exchange for other cryptocurrencies or for normal currencies, such as pounds, the euro or dollars.
  • You can conduct transactions online.
  • Some cryptocurrencies use blockchain technology and some are built around different platforms.

Cryptocurrency has become extremely popular, not least because it uses new technology which has almost infinite possibilities. Importantly for many disrupters, it is not managed by normal banks. Normal bank charges do not apply as you do not hold the currency in a bank but in a digital wallet.

You can buy or sell cryptocurrencies via different platforms both on and off the normal web.

  • If you are buying in the UK on the regular web via a standard browser from what you perceive to be a reliable source you will be subject to money laundering checks under UK rules.
  • If you buy on the dark web, ID checks can be almost non-existent. No matter how you set up your transactions through the dark web, you still run the risk of losing your money if dealing with dark-web merchants.

Many people invested in Bitcoin 'BTC'. For some, it went from purely a speculative bit of fun to hooking them, as with rocketing values huge profits could be made. Timing, however, is critical as is a detailed understanding of the market.

The exchange rate of nearly all cryptocurrencies is highly volatile. Between 2016 and 2018 many of their values reached extraordinary levels before falling dramatically: a major criticism of cryptoassets. Another is transparency with a serious concern that cryptocurrencies are useful for money laundering, in particular, trading over the dark web.

The main people to profit from cryptoasset gains appear to be those who have created them, their platforms or the miners. The BTC bubble has accelerated the creation of other forms of cryptoassets. When a new product is launched its creators will benefit from their initial holdings or additional awards of cryptoassets. After the cryptoassets launch (similar in form to a corporate initial public offering (IPO) they will become tradable on one or more exchanges. At this point, it can be traded into other asset forms, either other forms of cryptocurrency or fiat currencies.

How to tax profits or gains made on cryptocurrency: individuals

This section of the guide is for individuals and not companies. HMRC published separate guidance on the taxation of cryptoassets for companies in December 2019. 

Under conventional tax rules, whether your profits are taxed as income or your gains are taxed as capital, depends on whether you are trading (income) or investing (capital).

HMRC do not currently recognise BTC etc as a currency, however cryptoassets are intangible assets and appear to fall into s.21(1)(a) of TCGA 1992.

This means that disposal proceeds are taxed as capital gains unless there is evidence of trading.

Section 21 TCGA 1992 assets and disposals

(1) All forms of property shall be assets for the purposes of this Act, whether situated in the United Kingdom or not, including;

(a) options, debts and incorporeal property generally, and

(b) currency, with the exception (subject to express provisions to the contrary) of sterling, 

(c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.

(2) For the purposes of this Act—

(a) references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset, and

(b) there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of.

 

Trading or investment?

  • If you are actively mining BTC, or you are a dealer making multiple trades through buying and selling different investment assets or mixing currencies, you may well be treated as a trading operation.
  • If you are buying and holding your investment and then selling according to the market conditions, you are investing and your gains or losses will be taxed as capital.
  • Although there are thousands of different types of cryptoassets in existence it seems unlikely that HMRC would accept that buying and selling the most popular versions of these assets is a gambling activity.

The key test to determine whether you are trading for tax purposes is to apply what are known as the Badges of Trade. These look at what you do in your day job, the frequency of trades and your objectives in owning the currency. Each case needs to be considered on its own facts, especially given the multifunctionality of some cryptocurrencies.

  • If your profits are taxed as income, they are taxed at the same rate as a salary or profit from trading.
  • There are no special allowances or rates that apply to such profits.
  • If you make a trading loss, you should be able to offset this as sideways loss relief against your other income.
  • If you are trading you are expected to prepare trading accounts for tax and register as a sole trader for income tax.

If your gains are taxed as capital, you should obtain tax relief on the costs of trading, as in buying and selling. You may offset your annual CGT exemption (if unused).

  • If you make capital losses these are carried forward to offset against other gains made in the year or carried forward.
  • Cryptoassets are what are termed as fungible assets, therefore you can pool like with like. Gains in BTC can be offset with losses on BTC etc.
  • Where the assets are equity-linked, reliefs should be considered, and where debt-linked, exemptions considered, however, the position is not at all clear and advice should be sought.
  • HMRC confirms that cryptoassets may be pooled under s104 TCGA 1992 subject to the 30-day bed and breakfast rule.

Location of exchange tokens such as bitcoin

HMRC have issued guidance on the location (situs) of exchange tokens such as bitcoin which is primarily relevant for non-domiciled individuals calculating their tax liability on the remittance basis and for IHT purposes. 

HMRC consider that throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK. If an exchange token is co-owned between 2 or more beneficial owners then s275C TCGA applies (for CGT) and each beneficial owner’s interest in the asset will be where that beneficial owner is resident. If one or more of them is UK resident, this will not affect the location for any co-owners who are not UK resident.

This means a person who holds exchanges tokens is liable to pay UK tax if they are a UK resident and carry out a transaction with their tokens which is subject to UK tax.

CGT Share pooling: HMRC examples

Pooling

Under section 104 Taxation of the Capital Gains Act, 1992 and the pooling rule, each type of cryptoasset is kept in a ‘pool’. The consideration (in pounds sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’.

For example, if a person owns bitcoin, ethereum and litecoin, they would have three pools and each one would have it’s own ‘pooled allowable cost’ associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.

If some of the tokens from the pool are sold, this is considered a ‘part-disposal’. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.

Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool.

HMRC Example 1

Victoria bought 100 of token A for £1,000. A year later Victoria bought a further 50 of the tokens for £125,000. Victoria is treated as having a single pool of 150 of token A and total allowable costs of £126,000.

A few years later Victoria sells 50 of her token A for £300,000. Victoria will be allowed to deduct a proportion of the pooled allowable costs when working out her gain:

    Amount
Consideration   £300,000
Less allowable costs £126,000 x (50 / 150) £42,000
Gain   £258,000

Victoria will have a gain of £258,000 and she will need to pay Capital Gains Tax on this. After the sale, Victoria will be treated as having a single pool of 100 token A and total allowable costs of £84,000.

If Victoria then sold all 100 of her remaining token A then she can deduct all £84,000 of allowable costs when working out her gain.

Acquiring within 30 days of selling

Special pooling rules apply if an individual acquires tokens of a cryptoasset:

  • but on the same day that they dispose of the same cryptoasset (even if the disposal took place before the acquisition).
  • If within 30 following days they dispose of the same cryptoasset.

If the special rules apply, the new cryptoassets and the costs of acquiring them stay separate from the main pool. The gain or loss should be calculated using the costs of the new cryptoassets that are kept separate.

If the number of tokens disposed of exceeds the number of new tokens acquired, then the calculation of any gain or loss may also include an appropriate proportion of the pooled allowable cost.

HMRC Example 2

Melanie holds 14,000 of token B in a pool. She spent a total of £200,000 acquiring them, which is her pooled allowable cost.

On 30 August 2018 Melanie sells 4,000 tokens B for £160,000.

Then on 11 September 2018 Melanie buys 500 token B for £17,500.

The 500 new tokens were bought within 30 days of the disposal, so they do not go into the pool. Instead, Melanie is treated as having sold:

  • the 500 tokens she has just bought
  • 3,500 of the tokens already in the pool.

Melanie will need to work out her gain on the 500 token B as follows:

    Amount
Consideration £160,000 x (500 / 4,000) £20,000
Less allowable costs   £17,500
Gain   £2,500

Melanie will also need to work out her gain on the 3,500 token B sold from the pool as follows:

    Amount
Consideration £160,000 x (3,500 / 4,000) £140,000
Less allowable costs £200,000 x (3,500 / 14,000) £50,000
Gain   £90,000

Melanie still holds a pool of 10,500 token B. The pool has allowable costs of £150,000 remaining.

How to tax profits or gains made on cryptocurrency: businesses

In November 2019, HMRC released new guidance dealing specifically with the tax treatment of exchange tokens (for example, bitcoin). The tax treatment of security tokens and utility tokens will be addressed in future guidance. The current guidance also addresses how to deal with blockchain forks and airdrops.

A business is liable to pay tax on activities they carry out which involve exchange tokens, such as:

  • buying and selling exchange tokens,
  • exchanging tokens for other assets (including other types of cryptoassets),
  • ‘mining’ and
  • providing goods or services in return for exchange tokens.

HMRC have identified several ways in which exchange tokens might be subject to corporation tax including:

  • trading income,
  • loan relationships,
  • as intangibles,
  • and as investments (chargeable gains).

The calculation of businesses' taxable profits for the purposes of filling in a tax return is undertaken in pounds sterling, but tokens can be traded on exchanges that may not use pounds sterling (GBP). HMRC say if the transaction does not have a GBP value an appropriate exchange rate must be established in order to convert the transaction to sterling and taxpayers must keep records of the valuation methodology.

Taxable as trading income

As with the tax analysis of other types of business the question of whether a trade is being carried on is key in determining the correct tax treatment.

The badges of trade apply to determine whether the buying and selling of exchange tokens amounts to a trade. Particularly relevant factors include:

  • degree and frequency of activity,
  • level of organisation,
  • intention (including risk and commerciality).

If a person or business’s activities amount to a trade, the receipts and expenses will form part of the calculation of the trading profit.

  • If the trade is carried on through a partnership, the partners will be taxed on their share of the trading profit of the partnership.

Mining

The HMRC guidance specifically considers mining activities.

Their view is that:

  • Mining using an already owned home computer is unlikely to be trading. The value (at the time of receipt) of any cryptoassets awarded for successful mining is likely to be taxable as miscellaneous income, with appropriate expenses reducing the amount chargeable.
  • Mining using a bank of dedicated computers bought for that specific purpose and in the expectation of a profit (after taking into account the costs of buying and running the equipment) would probably be trading activity. Any profits must be calculated according to the relevant tax rules.
  • If the miner actually keeps the awarded assets, they may have to pay CGT or Corporation Tax (CT) on chargeable gains when they later dispose of them.

Where mining is a trading activity the exchange tokens will form part of trading stock and, as with any other type of trading stock, if the tokens are transferred out of trading stock (e.g. to be held as an investment) this will be a sale at market value. A profit or loss must be calculated.

Equally if exchange tokens held as an investment are transferred to trading stock, the asset is deemed to have been sold for its open market value at the date of the transfer. An election can be made to defer any resulting tax charge until the exchange tokens are actually sold.

Taxed under the loan relationships rules

A company has a ‘loan relationship’ if it has a money debt that has arisen from a transaction for the lending of money e.g. where it has lent or borrowed money. HMRC do not consider exchange tokens to be money or currency, meaning that the loan relationship rules do not apply other than where exchange tokens have been provided as collateral for an ordinary loan. Even where it is the exchange tokens themselves which are loaned - it is unlikely that this would constitute a loan relationship.

Taxed as intangible assets

Companies who account for exchange tokens as intangible assets may be taxed under the CT rules for intangible fixed assets if the token is both:

  • an ‘intangible asset’ for accounting purposes,
  • an ‘intangible fixed asset’ that is it has been created or acquired by a company for use on a continuing basis. Exchange tokens which are simply held by the company, even when held in the course of its activities, will not meet this definition.

Taxed as investments (chargeable gains)

  • All exchange tokens are digital and therefore intangible but they count as a ‘chargeable asset’ for CGT and Corporation Tax on if they are both:
    • capable of being owned and
    • have a value that can be realised.
  • If a company holds exchange tokens as an investment, they are liable to pay CT on any gains they realise when they dispose of them. If none of the above treatments apply, it is likely that the chargeable gains rules will.
  • If a sole trader holds exchange tokens as an investment, they are liable to pay CGT on any gains they realise.
  • If a partnership or an LLP holds exchange tokens as an investment, the partners (or members) are liable to pay  Capital Gains Tax (or CT on a chargeable gain if they are a company) on any gains they realise.

A ‘disposal’ for these purposes includes:

  • selling exchange tokens for money,
  • exchanging exchange tokens for a different type of cryptoasset,
  • using exchange tokens to pay for goods or services,
  • giving away exchange tokens to another person.

If a company gives away exchange tokens to another company which is not a member of the same group, or to an individual or other entity, this must be treated as a disposal at market value with chargeable gains being calculated accordingly. The recipient acquires the cryptoassets at that same market value.

If a company gives exchange tokens to charity, they will not have to pay CT on any gain. This does not apply if either:

  • they make a ‘tainted donation’, where a taxpayer donor enter into arrangements to obtain financial advantage, or
  • the company disposes of the tokens to the charity for more than the acquisition cost (so that they realise a gain).

Deduction of costs

As for individuals (see above) where a business is disposing of exchange tokens held as investments, they should be able to obtain tax relief on the costs of buying and selling the assets including:

  • the consideration (in GBP) originally paid for the asset,
  • transaction fees paid before the transaction is added to a blockchain,
  • advertising for a purchaser or a vendor,
  • professional costs to draw up a contract for the acquisition or disposal of the exchange tokens,
  • costs of making a valuation or apportionment to be able to calculate gains or losses.

The costs of mining activities will not constitute allowable costs here because they are not wholly and exclusively to acquire the exchange tokens. If the mining activity is part of a trade, it may be possible to deduct some of these costs against trading profits.

Pooling

The pooling rules apply for companies as for individuals (see above) with two exceptions:

  • if a company acquires tokens on the same day that they dispose of tokens of the same type (even if the disposal took place first), the disposal is matched with the same-day acquisition in priority to any tokens held in an existing pool.
  • If a company acquires tokens that would otherwise create or be added to a pool but within ten days makes a disposal of tokens of the same type, that disposal is matched with the acquisition within the previous 9 days in priority to any tokens held in an existing pool. If there has been more than one acquisition within the period, the rule applies on a ‘first in, first out’ basis.

Employment reward

  • If an employer awards cryptoassets, these are taxable as employment benefits. If they are provided by a third party the disguised remuneration rules at part 7A of ITEPA may apply.
  • If they fall within the description of readily convertible assets they are subject to PAYE.
  • If they are not readily convertible assets the employee must declare the amount received on the employment pages of their Self Assessment tax return and then pay the tax due via Self Assessment. For NIC purposes the employer should treat the payment as being a benefit-in-kind and pay and report any Class 1A NIC accordingly.

VAT

In 2014 HMRC produced a tax guide, Revenue & Customs Brief 9 (2014) Bitcoin and other Cryptocurrencies. This is out of date and in need of a rewrite. It mainly considers VAT aspects. The guidance issued in November 2019 does however have some provisional information on VAT and states:

  • VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.
  • The value of the supply of goods or services on which VAT is due will be the GBP value of the tokens at the point the transaction takes place.

Bitcoin and similar cryptoassets are to be treated as follows:

  • exchange tokens received by miners for their mining activities will generally be outside the scope of VAT.
  • When exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself.
  • Charges made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the necessary conditions will be exempt from VAT under Item 5, Schedule 9, Group 5 of the Value Added Tax Act 1994.

HMRC powers

If you are buying or selling cryptocurrency on the regular web through popular platforms, HMRC's bulk data-gathering powers may well extend to your broking platform. If the platform is in the UK your details and gains are capable of being reported to HMRC.

HMRC's data-gathering powers extend to other countries and there are data-sharing agreements with over 100 other countries.

There are difficulties for tax authorities is in keeping up with new technology and new online platforms. It looks as if there may major challenges in data sharing when the type of data is constantly evolving.

If you have used a cryptocurrency to purchase software or gaming points, it is unlikely that you have made a profit and HMRC will not be worried about you. You can claim tax relief on the cost of software if it used in your business.

If you have used cryptocurrency to buy whatever it is you chose to buy on the dark web it seems unlikely that you will have made a profit on cryptocurrency.

It may be difficult for any authority to track your transactions even if they are made via blockchain. It seems unlikely that HMRC is going to be concerned about what you purchase. What you sell and who you sell to is another matter.

Comments (1)

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Most crypto exchanges such as take advantage with customers funds because they feel these customers don’t know how to get their funds back, But trust me there are hidden ways you can get your lost funds back from the broker.

Comment was last edited about 2 weeks ago by Nichola Ross Martin Nichola Ross Martin
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