The Rise and Fall and Rise Again of Bitcoin – What About Tax?

The Rise and Fall and Rise Again of Bitcoin – What About Tax?

Bitcoin is very much a product of the new age of digitisation and has had a meteoric rise to prominence.

Alleged Global Economist Donald Trump has previously described the value of Bitcoin as “based on thin air” yet, it has value and continues to be used as currency and traded on the open market like other commodities.

And this is where it is interesting from a tax (and an accounting) perspective; just because you can’t physically hold it, it doesn’t mean it does not exist. HMRC’s guidance, whilst slow to emerge, is now very clear; disposals of cryptocurrencies are liable to tax.

To complicate matters, there has been the frequent changes in the market. Not long ago, Bitcoins were worth almost £15,000 each, but losses in confidence have meant Bitcoin (and other cryptocurrencies) have dipped before rising again.

So where does this leave people who have been on and off (and possibly back on) the Bitcoin train?

 

Where HMRC Stand

 HMRC’s position is clear; Bitcoin and other cryptocurrencies are verifiable assets and any gain/profits are taxable. This is because they can be owned and have a value that can be realised.

How they are taxed, though, is not the same for everyone.

Some activities with cryptocurrencies can amount to ‘trading’ (or income) dependent on level of activity an individual undertakes. For example, extensive Bitcoin mining or daily cryptocurrency trading can, factually, be part of what someone does day-to-day to generate extra income for themselves.

That being said, HMRC expect that, generally, the buying and selling of cryptocurrencies will normally be an ‘investment’ for individuals (i.e. a new kind of portfolio) and will fall within the scope of Capital Gains Tax (as opposed to being treated as income). Investors may therefore benefit from a tax-free annual Capital Gains Tax exemption (£12,300 for the 2020/21 tax year) to offset any gains which arise.

However, it should not be taken for granted that all cases will fall within the scope of Capital Gains Tax.  The full facts should always be considered in respect of the nature of the transactions being undertaken, the associated tax impact and how any losses will be utilised should they arise.

 

Where We, The Taxpayer, Stand

The key point to  understand is that every transaction undertaken in Bitcoin and other cryptocurrencies (even exchanges for other cryptocurrencies) is a taxable transaction for UK tax purposes and every transaction must be converted to pounds sterling at the date it took place.

In our experience, individuals (and even seasoned tax professionals) are not aware of this and do not recognise the tax impact of cryptocurrency transactions.

These are basic tax concepts but mean that individuals with significant amounts of transactions (usually at the click of a button and not ordinarily in pounds sterling) cannot easily ascertain their UK tax position and do require specialist assistance.

A recent client case illustrated the potential issues which may arise:

 A cryptocurrency investor made on average 10 cryptocurrency trades a month. This individual  crystallised 120 disposals for tax purposes each year and for each disposal they had to ascertain the sale price, review all their historic purchases and sales of the same cryptocurrency (potentially taking account of purchases and sales across different platforms), apply tax specific pooling rules to assess the ‘cost’ to be used for tax purposes and calculate the resulting gain or loss – all of which needed to be converted into pounds sterling at the date that each transaction took place!

Where do investors even start to unpick a year of transactions whilst needing to apply tax specific pooling rules? What records do they have?

Importantly though, there is a need for taxpayers to take action to ascertain their position (good or bad) as not knowing about a tax liability is not an excuse in the eyes of HMRC and can result in interest and penalties being applied i.e. inaction can increase the overall amount which needs to be paid to HMRC.

Therefore, individuals who have dabbled in Bitcoin or other cryptocurrencies are in the position where they need to work out what has happened, what the tax consequences are and if they need to report to HMRC.

Being unsure is not an excuse not to take action now.

Here to Help

Outline guidance is available from HMRC (“Cryptoassets: tax for individuals”) but please contact us if you or your client is impacted by any of the above and are in need of help in respect of the tax position or the associated reporting requirements to HMRC.

We would recommend anyone who has owned Bitcoin or other cryptocurrencies, to assess the tax consequences of the transactions they have undertaken as soon as possible and find out if they need to report or pay tax to HMRC – appropriate disclosure to HMRC and the mitigation of penalties may also need to be considered.

In this respect, we at Leathers can provide clear advice and assistance as we have experience of dealing with such matters and recognise the tax impact of the transactions undertaken. In addition, our expertise will allow individuals to understand the tax consequence of future transactions so they can move forwards and plan ahead.


Jonathan Carr

j.carr@weareleathers.com


Ryan Harrison

r.harrison@weareleathers.com

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