Everything you need to know about cryptocurrencies and UK tax

Cryptocurrency usage has soared in recent years, but despite the surge in global demand, the virtual currency is still very much shrouded in mystery.

In this blog, we explain some of the key details relating to cryptocurrency, including what it is, the common myths associated with it and the UK tax implications.

Cryptocurrencies – a brief explanation

Cryptocurrency is digital virtual currency that’s created using encryption technology or cryptography.

The first cryptocurrency was Bitcoin, a name that the vast majority of us have heard of by now. There are currently around 1,000 other variations in circulation. Other examples include Ethereum, LiteCoin and Ripple.

Cryptocurrencies are used on a global scale and, at present, international consensus on their legal status is yet to be agreed. It’s a grey area that’s attracting increasing amounts of attention, as demand for virtual currency grows and the possibility of virtual money going mainstream is getting closer by the day. At some point, the law will need to evolve to keep pace with cryptocurrencies as they continue to come into their own.

At present, there are two main ways you can go about obtaining a cryptocurrency. You can:

  1. Engage in an activity known as ‘mining’ – which is a system that allows computer users to calculate algorithms that are required to verify transactions in blockchains. As a result, they’re rewarded in a cryptocurrency or;
  2. Purchase them via a Bitcoin exchange – this involves you exchanging world currency (i.e. tenderable currency such as pound sterling or dollars) in return for a chosen cryptocurrency. 

Common myths

There are numerous misconceptions surrounding the use of cryptocurrencies, particularly relating to tax. Many people believe they aren’t taxable for all sorts of reasons, including the fact they’re:

  • Unregulated right now
  • Exchanged online
  • Viewed by some people as being a form of gambling, so don’t count as income. (Internal guidance from HMRC currently indicates that gambling or betting wins aren’t taxable and gambling losses cannot be offset against other taxable profits).

The truth of the matter is, they are taxable. And it’s highly likely that HMRC will catch up with cryptocurrency users who’ve made large gains because they’re most likely to transfer these gains back into traditional currency at some point. (Details relating to HMRC’s tax treatment of income generated by Bitcoins and other cryptocurrencies can be found within this guidance brief).

The tax reality

For all of the myths surrounding cryptocurrencies and regardless of how they’re obtained, they do fall under the tax radar. This means they’re subject to Income Tax, Corporation Tax and Capital Gains Tax, depending on how they’re being used. Let’s take a look at these tax treatments in further detail:

Tax treatment 1: Income Tax

HMRC use a series of tests, known as The Badges of the Trade, to determine whether or not trading activity has taken place. If it has, then Income Tax will apply.

Any profits will be subject to Income Tax at the individual’s marginal rates (20%, 40% and 45%). Class 2 and Class 4 National Insurance will also apply.

Tax treatment 2: Corporation Tax

Any trading profits that are made and are generated through a company are subject to Corporation Tax. Any trading losses can be dealt with by:

  • Offsetting them against the company’s total profits of the same accounting period
  • Relieving them against the company’s total profits for the previous accounting period
  • Carrying forward and offsetting them against the company’s profits from the same trade in a subsequent accounting period

Tax treatment 3: Capital Gains Tax

In situations where transactions are regarded as investments, rather than trading activity, HMRC require that Capital Gains Tax should be paid-  as do those that profit from disposal of stocks, shares and other investment instruments- via their annual self-assessment. The current Capital Gains Tax free allowance is £11,300 (2017/18) per annum so any gains up to this amount are effectively tax free.

The future

Cryptocurrencies is a rapidly-evolving world and against the backdrop of all of the changes, it’s widely reported that plans are afoot for the UK and EU governments to regulate Bitcoin and other cryptocurrencies.

It’s hoped that this will help bring the virtual currency in line with anti-money laundering and counter-terrorism financial laws. It’s also thought that traders will be forced to reveal their identities and cryptocurrency firms will be overseen by national authorities at some point.

All of these changes mean that it can be difficult for businesses to know where they stand with their cryptocurrency activity and tax liabilities. As with all tax responsibilities, it’s highly advisable that you don’t overlook them and that you do try and keep pace with any changes that are taking place. And if you have any queries, then make sure you speak to a specialist, it’ll save you a lot of time and hassle in the long-run.

For more information about cryptocurrencies, including the tax implications for your business, or to discuss any of the points above further with us, call us on 01905 777600 or email us at hello@ormerodrutter.co.uk.

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