I have recently come to the UK from Germany and make regular investments in cryptocurrencies (Bitcoin, Ether etc). How will the profits on these investments be taxed? As an early investor, I already have significant accrued profits.
Revenue & Customs Brief 9/2014, published in 2014, outlines HMRC’s approach to the taxation of cryptocurrencies. Although technology has developed since then, the principles underlying the guidance are still valid. In the UK, the legal position continues to be that cryptocurrencies are not treated as currency, nor are they regulated; this may change in due course and could affect the tax treatment.
The guidance identifies three possible treatments for profits on cryptocurrencies:
Case law has established the general principles underlying these treatments, which would also apply to profits on cryptocurrencies.
It is assumed that you will own the cryptocurrency personally: the tax treatment of profits in a company is likely to be different. It is also assumed that you own the cryptocurrency directly and not via a wrapper such as an ETF or fund.
Trading
Case law has established a number of ‘badges of trade’ which will be considered when determining if an activity constitutes a trade for tax purposes. These include profit seeking motive, frequency and number of similar transactions, connection with an existing trade, financing arrangements, length of ownership and reason for the acquisition/sale. A large volume of cryptocurrency transactions, where positions are taken for a short time only, may reflect a number of these badges.
However, case law (in particular Salt v Chamberlain [1979] 53 TC 143 and more recently A Ali v HMRC [2016] UKFTT 8 (TC)) has also established that profits arising to individuals from share dealing are not trading profits, even if the badges of trade are present. A similar principle can be applied to cryptocurrency dealing, and it is therefore very unlikely that profits would be treated as trading profits.
Gambling
Even if the badges of trade are present, HMRC’ s Business Income Manual (at BIM22015) states that ‘the basic position is that betting and gambling, as such, do not constitute trading’ (referring to the case of Graham v Green [1925] 9 TC 309).
The definition of a ‘bet’ was considered in Carlill v Carbolic Smoke Ball Co. [1892] 2 QB 484 and has been followed in later cases, and is reflected in the HMRC guidance (at BIM22016):
‘It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known.’
Cryptocurrency markets have become more established and the market fluctuations (arguably) less irregular. Although some commentators still say that cryptocurrency investments are a ‘gamble’, many investors have sophisticated investment and trading strategies which do not rely solely on chance.
It is therefore difficult to see how the profits on mainstream cryptocurrencies could be seen as gambling profits. There may conceivably be some cryptocurrencies in which the markets are random, and therefore the profits could be treated as gambling rather than trading profits.
The fact that the cryptocurrency profits are gambling – and therefore not treated as trading profits – does not preclude them from being subject to capital gains tax. Gambling transactions are typically only a cash wager between two parties, and therefore no chargeable assets are involved.
Capital gain
HMRC’s guidance pre-supposes that cryptocurrencies can be chargeable assets for CGT purposes. This is probably correct; they are intangible assets which carry certain rights, and can be bought and sold. The profits you make on cryptocurrency investments are therefore likely to be subject to CGT.
Remittance basis
If you have only recently come to the UK, you are likely to be treated as resident but not domiciled in the UK. This means that you can claim the remittance basis of taxation, under which income and gains which have a source outside the UK are only taxed if they are remitted to the UK.
Assuming that the cryptocurrency is an intangible asset for CGT purposes, TCGA 1992 s 275A provides that gains will be treated as arising in the UK if the asset is subject to UK law. Most cryptocurrencies are not governed by UK law, and therefore gains should not be treated as UK gains.
This means that the profits on sale of the cryptocurrency should not be taxed if the proceeds are kept outside the UK.
The position will be different if the profits are treated as trading profits. ITTOIA 2005 s 7(5) provides that where a trade is undertaken in the UK, the profits will be treated as arising in the UK. If you are investing in cryptocurrencies whilst in the UK, the trade would be undertaken in the UK and the profits would have a UK source.
Any profits you made before you came to the UK should be held in separate bank accounts as ‘clean capital’ so they can be brought to the UK without any tax arising.
Other tokens
This response only deals with cryptocurrencies. Increasingly, companies are issuing ‘tokens’ to investors which are based on a similar technology to cryptocurrencies. The rights attaching to these tokens vary greatly, and if you are investing in these, the tax treatment would need to be considered on a case by case basis. For example, some tokens may not be chargeable assets for CGT purposes.
I have recently come to the UK from Germany and make regular investments in cryptocurrencies (Bitcoin, Ether etc). How will the profits on these investments be taxed? As an early investor, I already have significant accrued profits.
Revenue & Customs Brief 9/2014, published in 2014, outlines HMRC’s approach to the taxation of cryptocurrencies. Although technology has developed since then, the principles underlying the guidance are still valid. In the UK, the legal position continues to be that cryptocurrencies are not treated as currency, nor are they regulated; this may change in due course and could affect the tax treatment.
The guidance identifies three possible treatments for profits on cryptocurrencies:
Case law has established the general principles underlying these treatments, which would also apply to profits on cryptocurrencies.
It is assumed that you will own the cryptocurrency personally: the tax treatment of profits in a company is likely to be different. It is also assumed that you own the cryptocurrency directly and not via a wrapper such as an ETF or fund.
Trading
Case law has established a number of ‘badges of trade’ which will be considered when determining if an activity constitutes a trade for tax purposes. These include profit seeking motive, frequency and number of similar transactions, connection with an existing trade, financing arrangements, length of ownership and reason for the acquisition/sale. A large volume of cryptocurrency transactions, where positions are taken for a short time only, may reflect a number of these badges.
However, case law (in particular Salt v Chamberlain [1979] 53 TC 143 and more recently A Ali v HMRC [2016] UKFTT 8 (TC)) has also established that profits arising to individuals from share dealing are not trading profits, even if the badges of trade are present. A similar principle can be applied to cryptocurrency dealing, and it is therefore very unlikely that profits would be treated as trading profits.
Gambling
Even if the badges of trade are present, HMRC’ s Business Income Manual (at BIM22015) states that ‘the basic position is that betting and gambling, as such, do not constitute trading’ (referring to the case of Graham v Green [1925] 9 TC 309).
The definition of a ‘bet’ was considered in Carlill v Carbolic Smoke Ball Co. [1892] 2 QB 484 and has been followed in later cases, and is reflected in the HMRC guidance (at BIM22016):
‘It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known.’
Cryptocurrency markets have become more established and the market fluctuations (arguably) less irregular. Although some commentators still say that cryptocurrency investments are a ‘gamble’, many investors have sophisticated investment and trading strategies which do not rely solely on chance.
It is therefore difficult to see how the profits on mainstream cryptocurrencies could be seen as gambling profits. There may conceivably be some cryptocurrencies in which the markets are random, and therefore the profits could be treated as gambling rather than trading profits.
The fact that the cryptocurrency profits are gambling – and therefore not treated as trading profits – does not preclude them from being subject to capital gains tax. Gambling transactions are typically only a cash wager between two parties, and therefore no chargeable assets are involved.
Capital gain
HMRC’s guidance pre-supposes that cryptocurrencies can be chargeable assets for CGT purposes. This is probably correct; they are intangible assets which carry certain rights, and can be bought and sold. The profits you make on cryptocurrency investments are therefore likely to be subject to CGT.
Remittance basis
If you have only recently come to the UK, you are likely to be treated as resident but not domiciled in the UK. This means that you can claim the remittance basis of taxation, under which income and gains which have a source outside the UK are only taxed if they are remitted to the UK.
Assuming that the cryptocurrency is an intangible asset for CGT purposes, TCGA 1992 s 275A provides that gains will be treated as arising in the UK if the asset is subject to UK law. Most cryptocurrencies are not governed by UK law, and therefore gains should not be treated as UK gains.
This means that the profits on sale of the cryptocurrency should not be taxed if the proceeds are kept outside the UK.
The position will be different if the profits are treated as trading profits. ITTOIA 2005 s 7(5) provides that where a trade is undertaken in the UK, the profits will be treated as arising in the UK. If you are investing in cryptocurrencies whilst in the UK, the trade would be undertaken in the UK and the profits would have a UK source.
Any profits you made before you came to the UK should be held in separate bank accounts as ‘clean capital’ so they can be brought to the UK without any tax arising.
Other tokens
This response only deals with cryptocurrencies. Increasingly, companies are issuing ‘tokens’ to investors which are based on a similar technology to cryptocurrencies. The rights attaching to these tokens vary greatly, and if you are investing in these, the tax treatment would need to be considered on a case by case basis. For example, some tokens may not be chargeable assets for CGT purposes.
