Type ‘what is…’ into a search engine these days and Bitcoin will sit high on the list of suggestions. Bitcoin and other cryptocurrencies such as Ethereum and Cardano may once have seemed like futuristic buzzwords, but their prevalence is growing fast. And as public interest in cryptocurrencies increases, so too does the attention they get from the taxman. So, it’s time to talk about ‘Bitcoin tax’.
Whether you own cryptoassets, trade in Bitcoin, or have made gains that you’re not sure how to declare, this guide will help answer your questions.
Cryptocurrencies also allow people to send ‘money’ overseas at a much lower cost (often more than 50% less) than other currencies, such as dollars, euros, and pound sterling.
Well, like ‘real’ money, you can use Bitcoin to trade, make online purchases, and pay for goods and services. While physical Bitcoins don’t exist, ‘a Bitcoin’ is essentially a computer file stored within a digital wallet app on a computer or smartphone. The technical jargon describes it as a ‘cryptographically secured digital representation of value or contractual rights’.
You can transfer and trade these ‘files’ with others. All Bitcoin transactions are recorded in a digital ledger called the blockchain. Bitcoins can be purchased in cash, received from others, or created by a computer (mining). Mining is a complex process. It involves verifying transactions and assisting in the development of the digital ledger in return for new Bitcoins.
While many retailers – and central banks – remain sceptical about Bitcoin, others are buying into it (both materially and metaphorically). PayPal now allow customers to buy and sell Bitcoin. Meanwhile, Tesla recently invested a whopping $1.5bn in the cryptocurrency. The Bank of Singapore has even gone as far as to suggest that Bitcoin could partially replace gold as a store of value.
Most people who have Bitcoin hold it as a personal investment. Their intention is to use it to make purchases or to benefit from capital appreciation in its value. If this describes you, then you’re likely to be liable to pay Capital Gains Tax upon disposal of your Bitcoin.
Bitcoins are intangible assets and are still considered a somewhat unconventional investment. Bitcoins and other cryptoassets count as ‘chargeable assets’ for Capital Gains Tax purposes. This is because they’re ‘capable of being owned’ and ‘have a value that can be realised’. Here’s an example of how it works in practice:
In the unlikely event that you earn and are paid in Bitcoin for services performed in the UK, Income Tax and National Insurance contributions (NICs) will apply (depending on the value of what you receive) – as they would with any other form of employment-related payment. If you’re in an employee/employer relationship, the taxing responsibility lies with your employer. Whereas, if you’re a self-employed contractor who gets paid in Bitcoin for an assignment, the tax obligation falls on yourself. In this instance, you’ll need to include such transactions in your annual self-assessment tax return. Your accountant can help you with this.
If you are successful in mining Bitcoin, the value of the Bitcoin/s at the time of receipt will also be taxable under Income Tax rules, ‘with any appropriate expenses reducing the amount chargeable’.
Certain ‘allowable costs’ can be deducted when calculating gains or losses in relation to Bitcoin and other cryptocurrencies.
The value of your investments (and any income from them) can go down as well as up. And, past performance is not a reliable indicator of future performance. What’s more, you may not get back the full amount of your investment, or any at all. So, before you decide to invest – whether it’s through your business or as an individual – it is best practice to seek the advice of a wealth management specialist.
HMRC are quite clear on this issue. ‘If your business carries out activities which involve exchange tokens (such as Bitcoin), you’re liable to pay tax on them’. They specify said activities as:
For a full list of the types of tax associated with cryptocurrency trading, mining, investments, loans, employee payments, airdrops, pooling, and more, click here. ‘HMRC will consider each case on the basis of its own facts and circumstances. They will apply the relevant legislation to determine the correct tax treatment, including contractual terms where relevant’.
So, HMRC are becoming ever more attuned to malpractice in relation to Bitcoin tax, increasing inquiries and penalising offenders. Information is regularly shared between HMRC and various cryptocurrency exchanges from across the UK to ensure compliance and reduce wrongdoing.
Earlier this year, ‘HMRC launched a consultation on the government’s approach to cryptoasset regulation’. The consultation aims to understand “how the UK can ensure its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability.” It also “calls for evidence on investment and wholesale uses of cryptoassets.” Read more here.
It’s a culture change for HMRC. They want to make people aware that they’re taking tax on cryptocurrency just as seriously as cash. And, they will investigate those who fail to disclose cryptocurrency transactions.
Furthermore, the onus is on you – rather than any crypto exchange site – to keep records of your cryptocurrency transactions. Keep track of the value of any transactions. And, note the volume of units transferred, as well as records of bank statements and digital wallet addresses.
Whether you own cryptoassets, trade in Bitcoin, or have made gains that you’re not sure how to declare, this guide will help answer your questions.
CONTENTS
What is Bitcoin?
Formed in January 2009 by ‘Satoshi Nakamoto’ (a presumed pseudonymous person/s), Bitcoin is a decentralised digital currency. That means it doesn’t have a central bank or a single administrator. Its rise in the last decade has been meteoric. And, at the time of writing (March 2021), a single Bitcoin is worth over £40,000. Though, its value does have a tendency to fluctuate rather more wildly than traditional currencies.Cryptocurrencies also allow people to send ‘money’ overseas at a much lower cost (often more than 50% less) than other currencies, such as dollars, euros, and pound sterling.
How does Bitcoin work?
So, it’s ‘virtual money’, it’s become an investment phenomenon, and it was mysteriously set up by the ‘Banksy of cryptocurrency’. But how does Bitcoin work?Well, like ‘real’ money, you can use Bitcoin to trade, make online purchases, and pay for goods and services. While physical Bitcoins don’t exist, ‘a Bitcoin’ is essentially a computer file stored within a digital wallet app on a computer or smartphone. The technical jargon describes it as a ‘cryptographically secured digital representation of value or contractual rights’.
You can transfer and trade these ‘files’ with others. All Bitcoin transactions are recorded in a digital ledger called the blockchain. Bitcoins can be purchased in cash, received from others, or created by a computer (mining). Mining is a complex process. It involves verifying transactions and assisting in the development of the digital ledger in return for new Bitcoins.
While many retailers – and central banks – remain sceptical about Bitcoin, others are buying into it (both materially and metaphorically). PayPal now allow customers to buy and sell Bitcoin. Meanwhile, Tesla recently invested a whopping $1.5bn in the cryptocurrency. The Bank of Singapore has even gone as far as to suggest that Bitcoin could partially replace gold as a store of value.
DID YOU KNOW… in May 2010, programmer Laszlo Hanyecz made the first ever documented purchase of a ‘good’ using Bitcoin. He bought two Papa John’s pizzas for 10,000 Bitcoins which, at the time, had an estimated value of around $41. Today, they’d be worth over half a billion dollars. Hope you enjoyed your tea, Laszlo…
Do I need to pay tax on Bitcoin?
While there is no specific tax legislation on cryptocurrency (‘Bitcoin tax’ doesn’t actually exist), as with any purchasable asset there are tax implications when you buy, sell and profit from Bitcoin. Furthermore, the rules differ between businesses and individuals.Most people who have Bitcoin hold it as a personal investment. Their intention is to use it to make purchases or to benefit from capital appreciation in its value. If this describes you, then you’re likely to be liable to pay Capital Gains Tax upon disposal of your Bitcoin.
Bitcoins are intangible assets and are still considered a somewhat unconventional investment. Bitcoins and other cryptoassets count as ‘chargeable assets’ for Capital Gains Tax purposes. This is because they’re ‘capable of being owned’ and ‘have a value that can be realised’. Here’s an example of how it works in practice:
- Satoshi buys £10,000 worth of Bitcoin.
- In the same tax year, he later sells the same quantity of Bitcoin for £25,000.
- Satoshi has made no other chargeable gains in that tax year.
- As a result, he can offset the £15,000 gain against his annual Capital Gains Tax allowance, which is £12,300.
- So, that’s a taxable gain of £2,700.
- If he falls into the basic rate tax bracket, he’ll get taxed at 10%. If he’s in the higher rate bracket, it’s 20%.
What if I earn or trade in Bitcoin?
If, on the other hand, you trade in cryptocurrencies at the same rate as a business or cryptoasset investment company, HMRC are likely to apply Income Tax to your profits, rather than Capital Gains Tax. However, this is pretty uncommon. According to HMRC, “only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, organisation and sophistication that the activity amounts to a financial trade in itself. If it is deemed to be trading then Income Tax will apply to profits (or losses) as it would be considered as a business.”In the unlikely event that you earn and are paid in Bitcoin for services performed in the UK, Income Tax and National Insurance contributions (NICs) will apply (depending on the value of what you receive) – as they would with any other form of employment-related payment. If you’re in an employee/employer relationship, the taxing responsibility lies with your employer. Whereas, if you’re a self-employed contractor who gets paid in Bitcoin for an assignment, the tax obligation falls on yourself. In this instance, you’ll need to include such transactions in your annual self-assessment tax return. Your accountant can help you with this.
If you are successful in mining Bitcoin, the value of the Bitcoin/s at the time of receipt will also be taxable under Income Tax rules, ‘with any appropriate expenses reducing the amount chargeable’.
Certain ‘allowable costs’ can be deducted when calculating gains or losses in relation to Bitcoin and other cryptocurrencies.
UK Businesses & ‘Bitcoin Tax’
As the sector develops, more and more companies are investing, and trading, in Bitcoin – and other cryptocurrencies. Bitcoin’s rapid (though fluctuating) appreciation in value over the last decade has made it a sought-after addition to a business’s balance sheet. According to a column in the Financial Times, ‘securing Bitcoin today [as a business] represents prudent risk management’ – regardless of the cryptocurrency’s long-term efficacy. The argument is that “a substantial increase in a competitor’s balance sheet [resulting from a rise in the value of their cryptoassets] could, in effect, place a company in strategic danger of being eclipsed in the marketplace”. But it’s not without risk.The value of your investments (and any income from them) can go down as well as up. And, past performance is not a reliable indicator of future performance. What’s more, you may not get back the full amount of your investment, or any at all. So, before you decide to invest – whether it’s through your business or as an individual – it is best practice to seek the advice of a wealth management specialist.
Bitcoin & Small Businesses
While larger-scale cryptocurrency investment may so far be limited to the Teslas and MicroStrategys of this world, a handful of smaller UK firms have already started accepting payments in cryptocurrency. So, what does all this mean in terms of tax?HMRC are quite clear on this issue. ‘If your business carries out activities which involve exchange tokens (such as Bitcoin), you’re liable to pay tax on them’. They specify said activities as:
- Buying and selling exchange tokens, or exchanging them for other assets/cryptoassets
- Mining cryptocurrency
- Providing goods or services in return for payments in cryptocurrency
- Corporation Tax
- VAT
- Income Tax
- NICs
- Capital Gains Tax
- Stamp Taxes
For a full list of the types of tax associated with cryptocurrency trading, mining, investments, loans, employee payments, airdrops, pooling, and more, click here. ‘HMRC will consider each case on the basis of its own facts and circumstances. They will apply the relevant legislation to determine the correct tax treatment, including contractual terms where relevant’.
Tax treatment of Bitcoin
The tax treatment of cryptocurrency develops as the technology evolves. HMRC does not recognise Bitcoin (or any other type of cryptocurrency) as money. However, for tax purposes, they do pay attention to the ‘nature and use of’ Bitcoins. They also acknowledge – and caution – that their views on the matter may change as the sector develops.So, HMRC are becoming ever more attuned to malpractice in relation to Bitcoin tax, increasing inquiries and penalising offenders. Information is regularly shared between HMRC and various cryptocurrency exchanges from across the UK to ensure compliance and reduce wrongdoing.
Earlier this year, ‘HMRC launched a consultation on the government’s approach to cryptoasset regulation’. The consultation aims to understand “how the UK can ensure its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability.” It also “calls for evidence on investment and wholesale uses of cryptoassets.” Read more here.
It’s a culture change for HMRC. They want to make people aware that they’re taking tax on cryptocurrency just as seriously as cash. And, they will investigate those who fail to disclose cryptocurrency transactions.
Furthermore, the onus is on you – rather than any crypto exchange site – to keep records of your cryptocurrency transactions. Keep track of the value of any transactions. And, note the volume of units transferred, as well as records of bank statements and digital wallet addresses.
Accounting for Bitcoin Tax
Cryptocurrencies are here to stay. But this is complex, and still relatively new, ground for many UK taxpayers. So, you need an accountant who can advise on Bitcoin tax. So, if you’re unsure about the tax implications of any cryptocurrency gains you’ve made, or if you’ve profited from Bitcoin and need specialist help putting together your next tax return, talk to Danbro today. Blog written by
Sam Wright
Sam Wright is Danbro’s Marketing Manager. He produces regular content and feature articles on our digital and non-digital channels – and social platforms – for the Danbro Group and its subsidiaries, as well as having responsibility for the Company’s internal and external communications.
His background is in Journalism and Creative Writing, having previously contributed to publications such as The Daily Post, The Lancashire Evening Post, and The Blackpool Gazette.
He is a keen swimmer and avid Manchester United fan (but don’t hold that against him), and he lives in Lancashire with his wife, Sarah.
