Cryptocurrency and the tax conundrum?

At the start of the year, one Bitcoin was worth just under $1,000, but the price has since peaked at a much higher amount. Some other cryptocurrencies, of which there are now more than 1,200, have resulted in gains of a much higher magnitude for those investing in the currency’s initial coin offering (ICO).

‘Cryptocurrencies’ is the term used to describe secure digital currency. The decentralised nature of a cryptocurrencies has presented tax collection agencies around the world with the problem of how to tax the gains made. For example, a person could buy Bitcoin using a UK bank account, use the Bitcoin to invest in various ICOs, and then cash the profits into a Japanese account. Or the cryptocurrency could be added on to one of the new Visa cards being launched and simply spent anywhere in the world.

HM Revenue & Customs (HMRC) issued guidance on how Bitcoin and other cryptocurrencies should be taxed in 2014, but this has not kept up to date with cryptocurrency evolution. For example, just this August, most owners of Bitcoin would have received free Bitcoin Cash when the currency was essentially split into two.

HMRC’s guidance states that each gain made when a cryptocurrency is converted back into pounds sterling must be considered on a case-by-case basis. A highly speculative transaction, such as the initial investment in an ICO, could be considered to akin to gambling and therefore exempt from tax – but with no relief for any losses.

As cryptocurrencies have become more mainstream, however, and with the amount of investment advice available, such treatment is now likely to apply to only a few currencies.

Gains will therefore normally be subject to capital gains tax. After the £11,300 exemption, the rate is 10% where a gain falls within a person’s basic rate tax band, and 20% thereafter. The calculation for Bitcoin Cash received for free will involve a minimal cost figure, so any disposal will be pure gain.

Detailed charts for cryptocurrencies along with useful links and other information for each currency can be found at https://coinmarketcap.com/all/views/all/

Other useful articles:

• R&D tax credits explained
• R&D Tax Relief - 5 reasons to claim