Tax Implications of Cryptocurrency Investments & Trading
In recent years Bitcoins, and other such cryptocurrencies, have become very lucrative investments nationally and globally. However, many are unaware of the tax implications within the UK of such investments. As a result, we have written a brief guide to help you ensure that you stay compliant with HMRC.
As laid out in Revenue and Customer Brief 9 (2014): Bitcoin and other cryptocurrencies, income received from Bitcoin mining activities will generally be outside the scope of VAT as there is an insufficient link between any services provided and any consideration received. This basically means that the purchase of a bitcoin is not related to the supply of a good or service, and is more about the transfer of currency, formulating the opinion that it is outside the scope of VAT.
Trading in cryptocurrency, or exchanging the currency to Sterling or for foreign currencies, will also be outside the scope of VAT as it falls within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.’
However, if cryptocurrency is used as payment for goods or services which fall within the scope of VAT these will be subject to VAT in the normal way and will be measured against the sterling value of the cryptocurrency at that point.
Corporation Tax Implications
In the same way, as a transaction in sterling is treated, the character of a transaction in bitcoin is considered to determine its taxability. Bitcoin is treated as a foreign currency.
For corporation tax, companies’ exchange gains will be taxable and losses deductible, following the general rules on currencies and loan relationships.
Income Tax & CGT Implications
The Brief continues on to speak about Bitcoins and other cryptocurrencies and their treatment under Income Tax (IT) and Capital Gains Tax (CGT); in other words, the correct way of declaring personal profits on the mining or purchase and subsequent sale of cryptocurrency.
Bitcoins and other cryptocurrencies are currently treated like any other investment and profits from sales must be declared via a Self-Assessment Tax return. They will be taxable under normal CGT rules – any income from the sale of Bitcoins will be offset against the purchase or mining costs, as well as any other charges associated with the sale, and CGT will be due on the final profits. Furthermore, they will be dealt with in their sterling value and any gain or loss calculated on this conversion.
If you are not currently registered for Self-Assessment this is something you may have to do. Additionally, if you have undeclared gains in previous years you should make arrangements to communicate the disclosure to HMRC before they become aware of this. Voluntary disclosure is treated with softer penalties than a compulsory one.
In conclusion, if you are investing in cryptocurrencies, or have done so in the past, it is worth considering these implications and how they may affect you. If you feel that you require more assistance or information on whether these rules affect you please see the below article or, alternatively contact us and we will be happy to help you.
Revenue and Customer Brief 9 (2014): Bitcoin and other cryptocurrencies sets out ‘the tax treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies, specifically for VAT, Corporation Tax (CT), Income Tax (IT) and Capital Gains Tax (CGT).’