Will Bitcoin profits give HMRC a new year to remember?
It is a little over a year since Bitcoin fever hit the headlines with its value peaking at approximately £17,275 on 31 October 2017, leading many to cash in their investments and trigger tax liabilities payable by the end of this month.
As many casual investors jumped on the Bitcoin bandwagon heavily last year, Andrew Bailey, CEO of the Financial Conduct Authority, warned in an interview with the BBC that Bitcoin carried a similar level risk to gambling. Unlike gambling winnings however, HMRC will seek to tax cryptocurrency profits and published new guidance in December 2018 to that effect.
For the majority of casual cryptocurrency investors, the CGT ‘annual exemption’ will usually be available. It is important to note that even if gains fall within the annual exemption, HMRC still require a tax return to be submitted if the total amount sold was more than £45,200 (i.e. four times the annual exemption). Where capital gains exceed the annual exemption, these will be subject to CGT at 10% or 20% depending on whether they are a basic or higher rate taxpayer.
HMRC has summarised the following scenarios as ones in which a cryptocurrency tax liability could be triggered:
selling cryptoassets for money;
exchanging cryptoassets for a different type of cryptoasset;
using cryptoassets to pay for goods or services; and
giving away cryptoassets to another person.
Some of these may come as a surprise to cryptocurrency investors, particularly those who trade regularly between different cryptocurrencies and may not have realised that every such trade represented a disposal they needed to report to HMRC.
In practice, trying to report such disposals is likely to be extremely difficult, particularly where more niche cryptocurrencies are involved. It requires the investor to try to ascertain the sterling equivalent of their cryptocurrencies sold and acquired, not an easy task and one which may sometimes be impossible to find out as no official sterling prices are published.
In addition to publishing when Bitcoin and other cryptoassets are taxable, HMRC has also outlined when losses might be used. Generally speaking, capital losses operate in their normal way, in that they can be carried forward against future capital gains made.
One of the few times a loss can be carried backwards is if it represents a ‘negligible value claim’. This isn’t defined in legislation but is generally taken to mean something that is ‘worth next to nothing’. That’s a difficult test to meet for a cryptocurrency as if it has a market value, even a low one, it is hard to argue it is effectively worthless. It might apply in certain circumstances where a cryptoasset is no longer traded and has effectively gone bust, meaning it might be possible to take the loss back two years to offset against historic capital gains.
In addition, whilst cryptocurrencies are digital in nature, it’s possible to hold them in physical form, such as on a USB stick. That of course leaves them open to being stolen in the same way as other currency. Theft, however, means the individual ‘still owns the assets and has a right to recover them’, meaning no capital loss is available.
It could therefore be a busy couple of weeks for those Bitcoin entrepreneurs who enjoyed a bumper Christmas in 2017 as they figure out their forthcoming tax liabilities, particularly if they have reinvested and are now sitting on big losses.
Will Bitcoin profits give HMRC a new year to remember?
It is a little over a year since Bitcoin fever hit the headlines with its value peaking at approximately £17,275 on 31 October 2017, leading many to cash in their investments and trigger tax liabilities payable by the end of this month.
As many casual investors jumped on the Bitcoin bandwagon heavily last year, Andrew Bailey, CEO of the Financial Conduct Authority, warned in an interview with the BBC that Bitcoin carried a similar level risk to gambling. Unlike gambling winnings however, HMRC will seek to tax cryptocurrency profits and published new guidance in December 2018 to that effect.
For the majority of casual cryptocurrency investors, the CGT ‘annual exemption’ will usually be available. It is important to note that even if gains fall within the annual exemption, HMRC still require a tax return to be submitted if the total amount sold was more than £45,200 (i.e. four times the annual exemption). Where capital gains exceed the annual exemption, these will be subject to CGT at 10% or 20% depending on whether they are a basic or higher rate taxpayer.
HMRC has summarised the following scenarios as ones in which a cryptocurrency tax liability could be triggered:
selling cryptoassets for money;
exchanging cryptoassets for a different type of cryptoasset;
using cryptoassets to pay for goods or services; and
giving away cryptoassets to another person.
Some of these may come as a surprise to cryptocurrency investors, particularly those who trade regularly between different cryptocurrencies and may not have realised that every such trade represented a disposal they needed to report to HMRC.
In practice, trying to report such disposals is likely to be extremely difficult, particularly where more niche cryptocurrencies are involved. It requires the investor to try to ascertain the sterling equivalent of their cryptocurrencies sold and acquired, not an easy task and one which may sometimes be impossible to find out as no official sterling prices are published.
In addition to publishing when Bitcoin and other cryptoassets are taxable, HMRC has also outlined when losses might be used. Generally speaking, capital losses operate in their normal way, in that they can be carried forward against future capital gains made.
One of the few times a loss can be carried backwards is if it represents a ‘negligible value claim’. This isn’t defined in legislation but is generally taken to mean something that is ‘worth next to nothing’. That’s a difficult test to meet for a cryptocurrency as if it has a market value, even a low one, it is hard to argue it is effectively worthless. It might apply in certain circumstances where a cryptoasset is no longer traded and has effectively gone bust, meaning it might be possible to take the loss back two years to offset against historic capital gains.
In addition, whilst cryptocurrencies are digital in nature, it’s possible to hold them in physical form, such as on a USB stick. That of course leaves them open to being stolen in the same way as other currency. Theft, however, means the individual ‘still owns the assets and has a right to recover them’, meaning no capital loss is available.
It could therefore be a busy couple of weeks for those Bitcoin entrepreneurs who enjoyed a bumper Christmas in 2017 as they figure out their forthcoming tax liabilities, particularly if they have reinvested and are now sitting on big losses.
