Are Bitcoin transactions taxed under the Income Tax or Capital Gains Tax regimes? How does the taxman value cryptocurrency transactions? What about VAT?
HM Revenue & Customs issued a Brief on the subject in 2014. At the time, Bitcoin probably wasn’t on everyone's radar! You can download a copy here.
HMRC acknowledges in the guidance that cryptocurrencies such as Bitcoin are a unique form of investment or currency, yet currently there are no UK tax provisions developed specifically for this area. Therefore, normal UK tax rules and principles appear to apply.
Activities involving Bitcoin
What activities may be relevant? In relation to Bitcoin, these could include:
- Mining (the process of creating new currency by solving complex algorithms)
- Buying and selling Bitcoin
- Using the currency to pay for goods and services (an increasing number of merchants now accept payment by Bitcoin)
Regarding VAT, HMRC’s position according to the Brief is that:
- Income from mining activities will generally be outside the scope of VAT
- Income received by miners for other activities might be exempt
- When Bitcoin is exchanged for other ‘normal’ currencies, no VAT is due on the value of the Bitcoins
- Charges made for carrying out transactions in Bitcoin will generally be exempt
However, VAT will be due in the normal way on the supply of goods or services sold in exchange for cryptocurrency.
Income Tax, CGT and Corporation Tax
Whether the treatment of income from activities involving Bitcoin will be subject to IT, CGT or CT will depend on the nature of the activity and the parties involved.
Therefore, as is so often the case, it is not possible to offer ‘hard and fast’ rules about how UK taxes will apply. Every case has to be considered individually, taking into account all facts and circumstances.
Where a Bitcoin transaction is highly speculative in nature, HMRC may be prepared to accept that any gain is not taxable and any loss not relievable - rather like with gambling wins and losses.
For traders who accept payment in Bitcoin (or similar), there is no change to the basic rules about how revenue is recognised or how taxable profits are calculated. For companies, the profits or losses on exchange rate movements between currencies are taxable and the normal rules on foreign exchange and loan relationships apply. Non-incorporated businesses would include the profits and losses on Bitcoin transactions in their accounts, and these would be taxable or relievable under normal IT rules.
Profits and losses on currency contracts that are not within trading profits or the loan relationship rules, will normally be taxable as a chargeable gain or allowable as a loss. Such gains and losses would be chargeable or allowable for CGT if incurred by an individual, or CT if incurred by a company.
Another interesting area is how to value cryptocurrency transactions for tax purposes. This may be reasonably clear in cases of arms-length transactions, where the currency is exchanged for cash or other items whose value is clear. If in doubt, specialist valuers at HMRC may be able to ascribe a market value.
If you have a question about any of these issues, contact us today.