Cryptocurrencies are currently something that everyone is talking about. In this blog, Richard Clarke in the Personal Tax team looks at the tax treatment of virtual currency Bitcoin.
What is Bitcoin?
For many, cryptocurrencies are simply a volatile bubble that will burst in the next few years but for others, it is the currency of the future.
The virtual currencies have a finite supply unlike traditional money and have no physical presence. The best-known cryptocurrency is Bitcoin. Its popularity has grown in recent years and is traded on ‘peer to peer exchanges.’ It has been described as a currency without a State to underwrite it and likened to banking without a bank.
Bitcoin can be used at participating businesses to buy goods or services online. In 2017, a property was put on the market in London and the owner indicated that he would be willing to accept Bitcoin rather than cash. This was thought to be a first for the UK. More recently, a Turkish football team purchased a player using Bitcoin.
Like normal currencies, Bitcoin can increase or decrease in value. Anyone who invests in or trades in Bitcoin should be aware that when a profit (or loss) arises this may have tax consequences.
Tax treatment of Bitcoin
Different VAT treatment applies to the production and exchange of Bitcoin in exchange for another currency. However, HMRC guidance makes it clear that neither activity will give rise to a VAT charge.
If a VAT registered person provides goods or services and is paid in Bitcoin, the value of Bitcoin at the point of transaction needs to be determined as this amount will be liable to VAT.
However, the following are exempt from VAT.
• The production of Bitcoin called ‘mining’ will generally be outside the scope of VAT.
• Activities such as the provision of verification services or the arrangement of transactions.
• When Bitcoin is exchanged for sterling or another currency.
Income Tax Treatment
When an individual actively engages in Bitcoin mining or trading, they fall within the scope of income tax. When a profit or loss arises on a Bitcoin transaction this must be reflected in their business accounts.
This profit or loss will be taxable under the normal income tax rules.
The income tax rates for UK taxpayers are 20%, 40% and 45% respectively. From April 2018, the income tax rates for Scottish taxpayers are 19%, 20%, 21%, 41% and 46%.
When deciding whether an individual is actively engaged in trading, HMRC apply a test and this is known as the ‘badges of trade.’ The weight given to each badge of trade will depend on the following factors:
• Profit-seeking motive – a transaction entered into with the intention of earning a profit is more likely to be a trade.
• The greater the frequency and number of similar transactions, the more likely there is of there being a trade.
• Length of ownership- the shorter the period of ownership, the stronger the evidence of a trade taking place.
• Method of acquisition – if Bitcoin was inherited rather than purchased it is unlikely that a trade was taking place.
Capital Gains Tax Treatment
An individual may hold Bitcoin as an investment but may not be actively trading. Any gain or loss realised on the exchange of Bitcoin for another currency would be chargeable or allowable for capital gains tax purposes.
• It is only the gains in excess of the annual exemption that are chargeable to capital gains tax.
• The annual exemption is currently £11,300 but other gains and losses for the year must be taken into account.
• Capital gains tax is payable at a rate of 10% up to the level of the basic rate band.
• The remaining gains are taxed at a rate of 20%.
It could be argued that a holding of Bitcoin that is intended to be used to buy goods or services overseas should be outside the scope of capital gains tax. This is because there is a capital gains tax exemption relating to the disposal of foreign currency acquired by individuals with the intention of it being used for personal means.
However, a Bitcoin ‘wallet’ is not a foreign currency bank account and so it seems unlikely that HMRC would allow this exemption to apply.
Corporation Tax Treatment
When a company is actively engaging in Bitcoin mining or trading, the profits and losses of the company should be reflected in the company accounts and will be taxable under normal corporation tax rules.
Profits or losses on exchange rate movements between currencies are taxable under the general rules on foreign currencies and loan relationships.
The rate of corporation tax from April 2018 is 19%.
If you have a query about the tax treatment of Bitcoin, please contact Richard at firstname.lastname@example.org or call 0131 558 5800.