Today we are talking about cryptocurrency tax – the whirlwind world of cryptocurrency continues to split opinion. Some see it as the future of trade, taking power away from governments and “the establishment”. Others remain baffled as to how it works, its legitimacy and security, and its longevity given the established structures we have. And for some, the terms ‘crypto’, ‘Bitcoin’, or ‘blockchain’ still mean diddly squat.
Whatever your take on cryptocurrency, HMRC’s stance seems clear: it is a taxable asset. Whether you accept crypto as a payment method in business, mine it or take advantage of the daily volatility in the crypto markets and trade coins for profit, or you’ve made the decision to hold coins as an investment, there are few scenarios where making money from crypto will fall outside the scope of UK tax. And make no mistake, people have made money from crypto.
In January 2017, the trading price of Bitcoin (just one of hundreds of cryptocurrencies, but without doubt the headline act) breached the $1,000 mark for the first time, and for many this alone would have been cause to celebrate. Even if you had invested just eight months earlier in May 2016, that would have marked a doubling of your investment – a much better return than anyone can currently expect on their ISA savings. But, for those early investors, the best was yet to come: in the run up to Christmas 2017, the price of a single Bitcoin hit an all-time high of almost $20,000, and with it, crypto millionaires were made overnight.
Now, for those holding cryptocurrencies as investments, hoping to capitalise on their growth in value over time, the tax position seems relatively straight forward. Cryptocurrencies are “intangible” assets (an asset without physical substance) and so, provided they are capable of being owned and their value realised, which most cryptocurrencies are, they fall within the scope of UK Capital Gains Tax (“CGT”) (or Corporation Tax for companies) when held and sold as investments.
The usual method of calculating the assessable gain will apply (proceeds less original cost and any associated costs of acquisition or disposal), as will the normal rates of CGT (or Corporation Tax), subject to the use of the CGT Annual Exemption for individuals (currently £11,700 per tax year). That means that even “casual” investors should continue to monitor the value of their gains and losses over each tax year and, if not already registered, register with HMRC to submit a tax return if their net gains exceed the reportable limits. It’s also worth maintaining up-to-date records of transactions, given that cryptocurrency exchanges can be prone to disappearing acts.
In its 2014 published brief (its only to date), HMRC teased crypto-holders with talk of a possible exemption from CGT where the initial investment may be “so highly speculative” that it is akin to gambling or betting, the gains and losses of which are exempt from UK CGT. But, in reality, how likely is it that anyone other than founding investors who took the gamble at the birth of cryptocurrency will be afforded this luxury status? Surely those who followed, and almost certainly anyone jumping on the bandwagon today, did so on hearing of the high returns proving to be available or with an interest in the technology that they believe will one day power many peer-to-peer transactions, both of which could be considered to be somewhat more than speculative intentions. It remains to be seen how lavishly HMRC apply this theory and no doubt the first publicised cryptocurrency tax case will go some way in illustrating HMRC’s approach.
The tax position of those trading cryptocurrencies is perhaps less straight forward. Firstly, at what stage do your crypto activities change from being investment to trade in the eyes of the taxman? Secondly, in the absence of specific cryptocurrency tax legislation, which principles should be applied to individuals “trading” cryptocurrencies?
The first question can be answered using the well-established concept known as the “badges of trade”. These “badges” have been developed over the years by the courts and are considered to be the characteristics that are common in all trading. As such, HMRC will rely on the concept and apply the various badges when considering whether or not certain activities constitute trade. Some of the more important badges include the presence of a “profit-seeking motive” and the “frequency of transactions” undertaken. It is this concept that cryptocurrency traders should apply when assessing which category their own activities falls within.
The answer to the second question is perhaps somewhat more ambiguous. Court rulings have previously adjudged trading in shares to be a speculative activity falling short of the meaning of trading for tax purposes when undertaken by an individual, but a conscious trading activity when undertaken by a company working within the limits of its constitution and towards its purpose of returning value to shareholders; a stance that HMRC has adopted. In the absence of crypto-specific tax legislation, many therefore assume that the very same principles will apply to those individuals who may meet the badges of trade for cryptocurrency, leaving their profits chargeable to CGT alone. This would be a beneficial stance for individuals, since CGT tax rates are likely to be markedly lower than the combined Income Tax and National Insurance rates that may otherwise be applicable.
HMRC has suggested that each case would be assessed on its own merits, and we would always recommend that any individual trading with cryptocurrencies obtains suitable professional advice on their specific circumstances.
For those involved in “mining” cryptocurrencies it is widely believed, even at this early, untested stage of cryptocurrency’s life in tax, that such activities will be considered as being trading. The efforts involved and the underlying motives of miners would appear to meet many of the badges of trade that indicate trading activities and, as such, companies or individuals undertaking cryptocurrency mining are likely to be caught under trading principles and their profits and losses charged to Corporation or Income Tax.
It could be argued that, whilst it hasn’t yet revolutionised the world’s payment systems, the introduction of cryptocurrency has already been a success. It may have only captured the imagination of a small number of businesses so far, but at the same time it has visibly challenged existing institutions to react and try to catch up with its pace of progression, both technological and economical. Whatever its future, for now HMRC is holding firm on its stance that existing taxation legislation will capture most profits and gains made by individuals and companies alike, and we would recommend that all crypto holders consider their tax position and take suitable advice, as well as remembering the risks and costs of non-compliance with tax laws.
If you’re interested in discussing your potential tax exposure to crypto gains, or any other tax or business matters, in further detail, contact us today for an initial free of charge meeting.