If you’ve made cash from Bitcoin in the UK, you could face a hefty tax bill: What you need to know
As the tax deadline fast approaches in the UK, those of you brave enough to have invested in the volatile world of cryptocurrencies, including Bitcoin, could be facing a hefty bill.
As much as Bitcoin, and other virtual currencies, may seem like a quick route to a fast buck, Her Majesty’s Revenue and Customs (HMRC) has warned that such gains are not out of the reaches of the taxman. Plus, given the recent volatility around Bitcoin prices, many investors may not even be aware of the tax owed on their cryptocurrencies.
In 2017, Bitcoin surged from around £710 to a peak of around £14,200, and is currently valued £6,040. Last month, it was reported the US Inland Revenue Service (IRS) compelled cryptocurrency exchange startup Coinbase to send data on 13,000 of its users as part of a tax evasion investigation. When we spoke to HMRC to get clarification on the UK’s approach to taxing such gains, the message was clear: not reporting gains could amount to tax evasion.
“We will not hesitate to use the powers Parliament has made available to us to identify those who are intent on evading tax,” an HMRC spokesperson told Alphr.
“The treatment of income received from, and charges made in connection with, activities involving cryptocurrencies will be subject to CT [corporation tax], IT [income tax] or CGT [capital gains tax] depends on the activities and the parties involved. Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts.”
Yet, despite the fact each case will be considered on the basis of its own facts and circumstances, HMRC emphasised that assets held as an investment may well be subject to Capital Gains Tax: “Where an asset (including Bitcoin) is held as an investment – as opposed to being working capital in a trading activity – the presumption is that any profit or gain on its disposal will be charged to Capital Gains Tax.”
Broadly speaking, traders will be liable to income tax whereas non-traders, everyday people who buy and sell the coins, will be liable to CGT. If you’re confused, or unsure if you’re liable, HMRC’s Business Income manual is a good place to start, especially if you’re unclear which category your investments fall into.
Trading and investments
Part of the confusion, of course, comes from the relative uncertainty around how tax is supposed to work with cryptocurrency, and the fact there are multiple types. As the Guardian recently reported, one Reddit user found themselves with a $50,000 (£36,000) tax liability on trades after they sold $120,000 (£86,000) worth of Bitcoin. The person sold the coins to buy other coins, which are now worth around $30,000 (£21,000). “I feel like I might have accidentally ruined my life because I didn’t know about the taxes,” the user wrote.
So, at what point would someone be liable to pay tax from profits on cryptocurrency investments? What if they sold from one type of cryptocurrency to another – say, from Bitcoin to Ethereum? Would they only be taxed once they sell back into pounds? The HMRC points to a policy paper on cryptocurrencies, as well as a guidance piece on capital gains. It notes that tax would depend on particular circumstances, but where capital gains tax is the rule, chargeable gain or allowable loss would arise when the cryptocurrency is sold or otherwise disposed of.
In a nutshell, swapping Bitcoin for Ethereum or even pound sterling will mean that gain or loss on the currency will accrue, and this could lead to a tax bill.
CGT: A brief explainer
There are, as you’d imagine, complications, so let’s dive a little more into Capital Gains Tax and liability. At its most simple, you’re liable on any gain you make when you sell, or “dispose”, of:
- Personal possessions worth £6,000 or more, with the exception of your car. This includes virtual possessions
- Any property that isn’t your main residence
- Your main home if you’ve used it for business, if it’s particularly large or if you used it to earn rental income
- Any shares that aren’t in an ISA or PEP
- Business assets, or so-called ‘chargeable assets’
Furthermore, if you dispose of an asset you own with someone else, you pay Capital Gains Tax on your share of the gain.
Your liability only comes into play, though, on gains made above your annual tax-free allowance. In the UK, everyone of working age is given a tax-free allowance. For the 2017/2018 tax year, this was set at £11,300 per person and £5,650 for trusts. HMRC also shows you your tax-free allowances for previous years.
You then pay 20% tax on anything earned between £11,501 and £45,000, 40% on anything about £45,000 and 45% on earnings above £150,000.
Onus on the individual
While the HMRC’s approach to crypto may sound straightforward, the relationship between tax authorities and crypto trading platforms could shift over the next few years. Currently the onus is very much on individuals to be responsible for reporting taxable gains, but how could this change if the IRS’ action against Coinbase sets a precedent for further investigations?
It may be the case that crypto-brokers become compelled to report transactions over a certain threshold, although – as the Guardian notes – this hinges on investors providing enough personal information in the first place.
“They may know of a transaction, and they may have a name, but can they enact any kind of enforcement? The question is what kind of information have investors given – besides an email address when they registered for an account?” Tax accountant Doug Sipe told the paper.