In the past year or so the value of Bitcoin has shot up. It therefore seems an opportune time to review its taxation for individuals.
How is it taxed?
For almost all individuals, gains or losses on bitcoin or other cryptocurrencies are dealt with under the capital gains tax regime. The gain or loss being calculated as the proceeds in pound sterling less the cost in pound sterling.
Where only part of a specific holding of a cryptocurrency is sold, the share-matching rules are used to determine the base cost of that part. This basically means taking the average cost of this currency, subject to matching against acquisitions within thirty days after sale.
Identifying a taxable disposal may not be as straightforward as people may think. Many investors use one crypto currency to buy another. This is treated as a disposal of the original currency and an acquisition of the new one with deemed proceeds/cost of the pound sterling value of the currencies at that time. Similarly, if cryptocurrencies are used to pay for goods or services, this is a disposal of the currency with proceeds of market value. This can make calculation, and record keeping, challenging.
Can it be income?
In contrast receipts from mining cryptocurrency, receipts of transaction confirmations and airdrop payments (unless received with no strings attached) are taxable as income.
If an investor engages in a very large number of trades annually and spends considerable time on this they could be deemed to be trading but this is very rare and, at current tax rates for income, not desirable.
Returning capital gains or losses on cryptocurrencies
For 2019/20, if the total proceeds from all taxable asset disposals were less than £48,000 and gains were less than £12,000 there is no need to complete a tax return unless a capital loss is to be claimed.
Where a return is required, gains should be included on the capital gain tax pages of the self-assessment tax return. If an investor is not in self-assessment, they need to contact HMRC as soon as possible.
Tax would be payable on 31 January 2021, subject to the time-to-pay arrangements now available.
If gains have been omitted from an earlier year’s return, investors have until 31 January 2021 to advise HMRC about 2018/19 omissions. If there are omissions for earlier years, it would be necessary to contact HMRC and if the amounts are substantial it would be worthwhile getting professional help to do this as there are potential large tax-based penalties.
The taxation of cryptocurrencies is relatively simple. The major challenges to investors are recognising the need to make returns and record-keeping, particularly for pure cryptocurrency transactions. Some people have made millions, failure to declare could be very expensive.