It could be that in recent weeks and months you’ve been like me, and seemingly a very large part of the world’s adult and probably teenage population, and you’ve been tempted or at least thought about “investing” in Bitcoin or one of the other cryptocurrencies. Equally, it could be that, also like me, you’re steered clear of it as you’re old enough to remember the Tulip mania bubble. (OK I admit that’s probably a slight exaggeration as that was in around 1637!)
Either way I suspect that thinking about how the gains you would hope to make would be taxed might not be terribly far towards the top of your agenda. Fortunately, our friends at HMRC have been way ahead of us all and issued guidance on this as long ago as 2014 in the form Revenue & Customs Brief 9/2014.
HMRC’s guidance says that there are three possible treatments for gains/profits which are made on Bitcoin or other cryptocurrencies – they could be:
- trading profits which will be subject to income tax, or;
- highly speculative transactions which are treated as gambling and therefore not subject to income tax; or
- capital gains which will be subject to capital gains tax.
UK Case law has long established a number of key indicators which are looked at in order to decide if an activity constitutes a trade for tax purposes. These include whether there is a profit seeking motive, the frequency and number of similar transactions, connection with an existing trade, financing arrangements and the length of ownership and reason for the transactions. A large number of cryptocurrency transactions, where positions are taken for a brief or short time only, may reflect some of these indicators in which case it would look like this sort of activity would be classified as trading and subject to Income Tax.
There is however case law which has long established that profits arising from share dealing are not trading profits, even if the above indicators are present. Dealing in cryptocurrency is pretty similar to share dealing and it is therefore unlikely that profits would be treated as trading profits.
Betting and gambling are not considered a trade for tax purposes even if the key indicators mentioned above are present and are not subject to income tax. There are now pretty established markets for cryptocurrency dealing and it is generally considered that even though highly speculative these transactions are not treated as gambling and therefore profits or gains are likely to be taxable.
HMRC’s view seems to be that cryptocurrencies can be chargeable assets for capital gains tax purposes and most commentators agree with this. As a result, the “profits” you make on cryptocurrency investments are likely to be subject to capital gains tax.
Most of us are interested in the trading gains to be achieved from Bitcoin and similar cryptocurrencies. If you are one of those people trying to mine Bitcoins, then the good news is that any income received from Bitcoin mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes as there is an insufficient link between any services provided and any consideration received.
Personally I’m off to buy some tulips – I may not make any money out of them but at least they are likely to please my wife!
If you are in receipt of Bitcoin and want to discuss the likely tax implication on your gains, please contact Gary on firstname.lastname@example.org or call on 020 8418 2770.
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