In recent weeks and months the media has been full of reports discussing the significant increases or falls in value of Bitcoin and other cryptocurrencies.
HMRC’s view on the tax treatment of Bitcoin and similar currencies is as set out in their Revenue & Customs brief published on 3 March 2014.
Essentially, where an individual buys Bitcoin as an investment, the Bitcoin is a chargeable asset for CGT purposes. Any gain made on disposal, net of any available allowable losses and the annual capital gains exemption (£11,300 for the 2017/18 tax year), is subject to CGT at current rates of up to 20%.
The same principle applies for limited companies investing in Bitcoin where chargeable gains on disposal (after deducting any available Indexation Allowance but noting this was frozen with effect from December 2017 onwards) will be subject to corporation tax at the current rate of 19%.
In relatively rare cases an individual’s bitcoin purchasing and selling activities may amount to a trade for income tax and NIC purposes which raises the possibility of combined tax and NIC rates of up to 47% rather than CGT at 20%. Frequency of transaction is likely to be a key consideration here.
It is worth noting that Bitcoin will be treated as sold, and a gain or loss crystallised, for tax purposes when it is converted into another currency (whether £ sterling, US $ or another cryptocurrency) or when it is used to purchase another asset or goods or services.
Some UK resident individuals may be labouring under the misapprehension that their Bitcoin activities amount to gambling which is exempt from tax. It is vital for such individuals to remember that HMRC’s published stance is in stark contrast to this and that under our Self-Assessment tax regime the onus is on the individual to declare any gains made and pay any CGT due accordingly. Unpaid tax, interest on late paid tax and penalties will result if individuals ignore their tax return compliance obligations. In extreme cases of deliberate non-compliance HMRC will prosecute.
Looking ahead it will be interesting to see if any upcoming tax tribunal cases challenge HMRC’s published view that the normal principles of tax legislation apply to the buying and selling of Bitcoin and similar assets.
In the meantime, any individuals or companies should ensure they take advice on complying with their tax obligations as regards their Bitcoin activities.
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