Cryptocurrency and tax: what you need to know

Cryptocurrency market

Cryptocurrency has seen an incredible surge in popularity amongst investors in the past year. The most popular of these virtual currencies by far is the Bitcoin, although there are approximately 1,800 others including Ethereum, Litecoin and Zcash.

In 2017, Bitcoin rose in value by a staggering 1,600%, with a single Bitcoin worth £14,760 in December 2017. This has settled more recently to £5,419 as of 31st August 2018.

Although cryptocurrencies are currently unregulated, they are still subject to UK tax laws. Any tax liabilities arising from virtual currencies in the 2017-18 tax year will need to be reported and paid to HMRC by 31st January 2019.

HMRC have said that due to the evolving nature of the cryptocurrency market, they will likely produce further guidance in the future. However, the most recent guidelines are from 2014 – therefore, confusion remains on how cryptocurrency earnings should be taxed.

We have put together a list of questions our tax team are frequently asked to help you through the cryptocurrency minefield.

Frequently asked questions

What is cryptocurrency?

Cryptocurrency is a digital or virtual currency that uses encryption technology to ensure the security of transactions involving its use. It uses crypotography – which processes legible information into an undecipherable code in order to track purchases and transfers.

Cryptocurrencies use decentralised control, as opposed to a central banking system. This control works through a public transaction database, or blockchain, which functions as a distributed ledger.

How do you obtain it?

Cryptocurrency can be obtained in two ways, and HMRC regards each as different in terms of its tax treatment:

  • Mining: a system which rewards users with cryptocurrency when they calculate complex algorithms to verify each transaction in the blockchain.
  • Purchasing: Cryptocurrency can be purchased by exchanging ‘real-world’ currency such as Sterling or US dollars.
How is it taxed?

Within their Revenue and Customs Brief 9 (2014), HMRC state that the treatment of income received, and charges made will depend on the activities and parties involved. As previously mentioned, how you have obtained your cryptocurrency will impact how you are taxed.

HMRC regards an individual who mines cryptocurrency as a trader, whereby mining is classified as their profession. Any profits made this way will therefore be taxed as self-employment income and be subject to income tax and National Insurance Contributions.

If an individual purchases cryptocurrency on an exchange, they will be liable for Capital Gains Tax. This tax is applied anytime a cryptocurrency is converted into another currency or cryptocurrency. Capital Gains Tax is due at a rate of up to 20% on the increase in the value of the currency from when it was first acquired to when it is converted.

What about companies?

As companies are prohibited from gambling, speculative transactions (eg, trading in Bitcoin) will most likely be regarded as trading for tax purposes. Any trading profits of a company will be subject to Corporation Tax at 19%. Trading losses can be offset against the company’s total profits in some instances.

What action should I take?

If you have used Bitcoin to purchase additional forms of cryptocurrency, you may be liable for CGT at every transaction point, whether you have converted into Sterling or not. If you have traded extensively with Bitcoins and other cryptocurrencies, we strongly recommend reviewing your activity with a tax adviser to ensure any outstanding liabilities are met by January 2019.

If would like to find out more about how your Bitcoin or cryptocurrency earnings are taxed, please get in touch with us on 01903 234094.