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22nd February 2018

Taxation of Cryptocurrencies

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Cryptocurrencies such as Bitcoin and several other variations are becoming more well known, particularly among the ’tech savvy’. To date their values have been volatile with substantial increases and decreases in relative value, but who knows for how long? Certain people will recall hearing about the South Sea Bubble!
In the meantime how are such gains treated for tax purposes? There are three main treatments possible:-

  • Trading profits
  • Gambling gains
  • Capital gains
Trading requires a number of ‘badges of trade’. Although buying and selling of cryptocurrencies on a large volume basis may reflect a number of these badges, the cases of Salt v Chamberlain and Ali v  HMRC held that regular share dealing did not amount to a trade. Therefore frequent cryptocurrency dealing would also be unlikely to be a trade for tax purposes.

Betting and gambling gains as such are not subject to tax. In a wager each party may either win or lose depending on the outcome of the event. Although some would regard buying a cryptocurrency as a gamble, a crypto currency is not a wager as, although its value may rise and fall, you would continue hopefully to hold something of value. Some would argue that investing in the stock exchange is a gamble, but they would not expect any stock exchange gains/gambles to be tax free.

The holding of foreign currencies and selling at a later date at a profit is taxed as a capital gain. In the UK cryptocurrencies are not legally currency,  but they are still intangible assets that carry certain rights. As such they can be bought and sold and as with other such assets would be subject to capital gains tax (CGT).   Each individual has an annual allowance for CGT which for 2017/18 is £11,300.   Therefore annual gains below this value would not be taxable. Gains over this level would be taxable at 10% for basic rate tax payers and 20% for higher rate taxpayers.   

HMRC have looked at this area in the past. It is developing rapidly however and they will be likely to revisit the tax treatment in the future. Being taxed as a gain, as at present,  is generally better than being taxed as trading income.

If you would like help with your tax return, or any CGT issue, please contact Eric Wardle on 01604 463110 or click here to email Eric.