Taxing Cryptocurrencies

Taxing Cryptocurrencies is a key issue following the rise in value of such currencies as Bitcoin, where holders have sought to cash in on the gains.

Here, Mark Richdon (pictured left) and Stephen Martin (pictured right) discuss the tax implications for digital currency holders.

Do I have to pay tax if I make a profit?

In short, yes, or at least in the vast majority of cases. Looking through the complexity of blockchain technology, HM Revenue & Customs (HMRC) see cryptocurrencies as something that can be bought, sold or exchanged, and so tax it like any other tradeable commodity.

What tax do I have to pay?

This will be determined by the facts, but there are three possible ways crypto profits could be taxed:

  • Paying income tax at rates of 20%, 40% or 45% if you are considered to be trading in crypto;
  • Paying capital gains tax at rates of 10% or 20% if you are not trading in crypto, or, in rare cases
  • treated as gambling and not subject to tax at all

If you are using your company to invest in crypto then the universal rate of corporation tax, currently 19%, would apply, regardless of whether the company is trading in crypto or not.

When can my crypto investment be treated as gambling?

Unfortunately, it is very difficult to see how profits on mainstream cryptos could be seen as gambling, given the established markets the crypto operate in. An interesting test case might look at cryptos in their infancy, where the markets are sufficiently random that investments rely solely on chance, but this may be some years away.

So when would I be treated as trading in crypto?

There are a number of ‘badges of trade’ which have been established by the Courts. These look at the number of transactions, sources of finance, regularity of sales, and the intention behind the investment, amongst other factors. The particular circumstances are examined; there are no safe harbours.

Do I have to tell HMRC if I have sold crypto?

If you are trading in crypto, HMRC will expect you to complete a tax return.

If you are not trading in crypto, then profits you make will normally be taxable as a chargeable gain. If your total gains in a tax year, including crypto gains, are below the Annual Exemption (£11,700 for 2018/19 tax year) you do not have to report this to HMRC, provided your proceeds are not more than 4 times the Annual Exemption. In other cases, gains will need to be reported.

In the unhappy event that you make a loss, filing a tax return will enable you to capture this loss for potential use in the future.

For more information, please contact a member of our tax team.

[This article first appeared in the October 2018 edition of Ahead of the Curve magazine, published by solicitors, Royds Withy King]

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