Last month, I published a post about the rise of Bitcoin, pointing out some signs that suggest the cryptocurrency, as well as other, rival coins, might be on the brink of establishing themselves as more mainstream investment opportunities as we enter 2018.
As a decentralised currency, the legal and regulatory status of Bitcoin – as well as alternative digital currencies – is still being established and varies greatly between jurisdictions. In this latest blog I will consider the current tax implications of using cryptocurrencies in the UK, in comparison with other contrasting regimes.
The Treasury is planning a Bitcoin crackdown in an aim to prevent money laundering and tax evasion, but what is the current position?
UK hobbyists fall outside HMRC’s remit
In the UK, HMRC bases its decision on whether tax is paid on crypto gains on the personal circumstances of the individual involved.
If the individual buying and selling cryptocurrency is doing so merely as a hobby any resulting profit falls outside the tax regime so is currently exempt. On the flip side, this of course means that any losses are ineligible for tax relief.
While HMRC may be tempted to take a slice of the pie – especially with valuations continuing to soar – its current stance is entirely consistent with the way it treats other risky and speculative activities undertaken by hobby investors. Comparable examples are individuals active in the forex markets and gamblers placing bets online.
HMRC’s position reflects that crypto is a high risk, volatile market. If tax was levied on profits and then the value of coins came tumbling down, personal investors would be hit with a double whammy of a tax bill on gains they no longer have. This would make a bad problem a whole lot worse.
UK tax regime for professional investors
HMRC decides on a case-by-case basis whether speculation on digital currencies is a hobby. If it considers that the investor (whether an individual or a corporation) has a professional interest then taxes could be payable. This includes those trading, mining or processing payments in cryptocurrencies, as well as those providing related services.
Although the difference between a hobbyist and a professional investor isn’t clearly defined, the onus is on the investor to provide sufficient evidence of their status to HMRC. If they are deemed to be a professional trader, then income, corporation and capital gains taxes would all apply (depending on the nature of the transaction and capacity in which it was executed), just as they would on normal currency transactions.
With no visibility into cryptocurrency trades, HMRC is wholly dependent on businesses and professional investors disclosing any income generated. This is a similar situation to cash. Just as it is illegal not to disclose cash income, the same is true for digital currencies. Failure to do so could lead to prosecution.
Changes to UK VAT
Although cryptocurrencies are a fairly recent innovation, HMRC has already changed its position on how VAT should be applied. These changes came into effect in 2014.
Currently, VAT is only charged in incidences when digital currencies are used to pay for goods and services (once again, just as it would with traditional currencies). Meanwhile, income from mining activities, from transactions between cryptocurrencies and normal currencies, and from transaction fees are now generally VAT exempt.
Elsewhere in the world
A key attribute of these digital currencies is that they are decentralised, so act independently of central banks and their fiscal controls. This makes them the closest thing to a global currency the world has witnessed. Tax regulation, however, varies considerably between nations, and this includes the treatment of digital coins.
Here are just two contrasting regimes of note:
- US: The IRS classifies Bitcoin, not as a currency, but as property. This makes any related income subject to either short-term income tax rates or long-term capital gains tax rates. Every US tax payer is required to declare all cryptocurrency transactions in their annual tax returns, with the applicable tax applied to each and every deal, however small. Whether they are actually disclosing these deals is a subject of debate.
- Germany: Here, Bitcoin is treated in a similar way to stocks and shares. Capital gains tax is applied to any profits made within the first year of ownership. After this point, they are no longer subjected to taxation. Thus, taxpayers who hold Bitcoin for longer than one year will not be subject to capital gains tax and their transaction will fall within the scope of a non-taxable “private sale”.
These are just two examples; globally there are great variations in the way tax regulators treat these currencies.
To add to the complexity, the varying compliance and regulations laws around the world are constantly under review, reflecting the pace of change in the market, the growth in market participation, and each individual country’s appetite to incorporate cryptocurrency into their financial systems.
We expect to see considerable changes to tax regulations as the global cryptocurrency markets continue to mature and develop into the mainstream.
By Arianne King