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. 

What is a cryptoasset or cryptocurrency?

There many different types of cryptoassets, and the so called 'cryptocurrencies ' are just one variation. 

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

Cryptocurrency shares many similarities to other currency:

  • You have flutuating exchange rates which are driven by the market.
  • You can buy and sell currency in exchange for other crycurrptoency or for normal currencies, such £pounds, 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 and importantly for many disrupters, it is not manged by normal banks and normal bank charges do not apply as you do not hold currency in a bank but in a digital wallet.

You can buy or sell cryptocurrency 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 however, depending on how you set up your transactions on of the risks of some dark web merchants is that you run the risk that you might lose your money.

Many people invested in Bitcoin 'BTC', firstly as a purely speculative bit of fun and then got rather hooked on them due to the fact that high exchange rate created huge profits could be made, provided that your timing was good and you had a detailed understanding of the market.

The exchange rate with cryptocurrency is highly volatile and between 2016 and 2018 exchange rates have reached extraordinary levels in Europe, the US and in the far East.

For every profit made, someone may have made a loss, however it is perfectly possible, given that cryptocurrencies feature significantly on the dark web, that cryptocurrency is useful for money laundering.

The main people to profit from cryptoasset gains appear to be those who have created them or their platforms or mined them. The BTC bubble has accelerated the creation of other forms of cryptoasset and when a new product is launched its creators will benefit from their initial holdings or awards of assets. If the launch goes well these assets may be converted into different assets.

How to tax profits or gains made on cryptocurrency?

This guide is for individuals and not companies. 

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 does 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 dealer making multiple trades buying and selling different investment assets or mixing currencies you may well be treated at trading.
  • 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 these assets is a gambling activity.

The key test to determine whether you are trading for tax purposes is to apply what are known at the Badges of Trade. These looks at amongst other things what you do in your day job, the frequency of trades, and your objectives in owning the currency.

  • If your profits are taxed as income, they are taxed at the same rate as say 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 registere 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.
  • There are not any pooling matching rules to consider.

HMRC and cryptocurrency

HMRC produced a tax guide, Revenue & Customs brief 9 (2014) Bitcoin and other crypocurrencies. This is out of date and in need of a rewrite. It mainly considers VAT aspects.

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 and 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 and it looks as if there may major challenges in data sharing when the type of data is constantly evolving.

If you have used cryptocurrency to purchase software or gaming points its unlikely that you have made a profit and HMRC will not be worried about you. You can claim tax relief on the cost 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. There is concern on some forums that people will who have used mixing when sending crytocurrency could be targeted by HMRC. It seems unlikely that HMRC is going to be concerned about what you purchase, what you sell and who you sell to is an other matter.