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Bitcoin and other Cryptocurrencies

05-Mar-2018

Bitcoin and other Cryptocurrencies

Bitcoin is one of the best known digital currencies to emerge in recent years and as we now have a number of clients that are using Bitcoins either by investing or mining on a personal level, or accepting them as payment for business services.  We thought this would be a good opportunity to look at the tax implications.

What do we know about Bitcoins? Put simply Bitcoin is a virtual currency: it has no physical form. It is independent of any bank or country and as such there are no bank charges. Bitcoins are stored in an electric wallet and transactions are recorded in a database called a 'block-chain'. Bitcoin miners can discover unowned Bitcoins by solving complex algorithms and adding these to the chain.

At present, HMRC are offering tentative guidance with the caveat that each case will be looked at individually but the general principles are as follows:

For an individual collecting and selling the currency, any gains or losses on the sale of Bitcoins will usually be subject to the capital gains tax regime. If the sale price exceeds the purchase cost then this creates a capital gain. As an individual you would be entitled to an annual exemption (£11,300 in 2017/18) against all of your capital gains in that tax year and any gain arising during the year to 5 April will be due for payment by 31 January of the following year. Investors should ensure they keep a record of sale and purchase prices and dates.

If the amount of activity in buying and selling Bitcoins is significant and as such could be considered trading, then any profits would be subject to income tax and Class 2 and 4 National Insurance.

If you are a business receiving Bitcoin as a currency, then there may be small differences in the value of that currency between the invoice date and the payment date. These 'exchange rate' differences would be reflected in the accounts and subject to income tax or to corporation tax if the business is incorporated.

With regard to VAT, any income from mining is outside the scope, and there is no VAT due when Bitcoin is exchanged for other currencies. When goods and services are supplied in exchange for Bitcoin, VAT is charged in the normal way based on the sterling value of the Bitcoin when the transaction takes place.

Finally, there is an argument that, because some transactions are highly speculative and amount to gambling, then the gains and losses are not taxable and similarly losses cannot be offset against other taxable profits. We reiterate the point that HMRC will consider these on a case by case basis.

And just to clarify, as Chartered Accountants we are not able to provide any financial advice and therefore the publication of this article does not in any way endorse the investment in Bitcoins or any other Cryptocurrency.

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