Taxing Bitcoin

Taxing Bitcoin and other cryptocurrencies varies in different countries and the available guidance is often rather thin. However, we have an ever-increasing number of clients who are either paid in a cryptocurrency or are investing in Bitcoin, Etherium or one of the many cryptocurrencies on offer today.

In the UK, the fullest guidance is in the Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies. The HMRC view is to look at transactions on a case-by-case basis, ‘on the basis of its own individual facts and circumstances’ to decide whether a transaction should be taxed as income or a capital gain. So, they say ‘For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated’.

So, if you are self-employed, the profits and losses on Bitcoin transactions must be shown in your accounts and will be subject to income tax and National Insurance just as if you were paid in pounds, euros or dollars. If a profit or loss on a cryptocurrency is not  a trading profit it will normally be taxable as a chargeable gain or allowable as a capital loss. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for CGT if they accrue to an individual or, for CT on chargeable gains if they accrue to a company.

Being able to claim a capital loss if the value falls is not as automatic as you might think. HMRC summarise the situation like this; ‘The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable.. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits’. Having dealt with cases of loss claims on more conventional currency trading, we know that HMRC are reluctant to concede these as losses and will go to some expense to fight the case, so beware assuming that the taxation of bitcoin losses will fit with your common sense view of what should happen!

For Corporation Tax, we are told that ‘the profits or losses on exchange movements between currencies are taxable’ and that the general rules apply to Bitcoin as to other transactions so HMRC see no need for specific rules on cryptocurrencies. In other words, their view could be summarised by saying that if it walks like a duck and quacks like a duck … it is a duck! In due course we will see some case law and further clarification emerge but at present we go back to first principles to deal with cryptocurrency transactions in order to understand how HMRC view taxing Bitcoin.