At its height in December 2017, bitcoin reached a value of over $19,000, only to then fall in value within a couple of months to under $7,400. At the time of writing, bitcoin is trading at a value of around $3,700.
Given this volatility, many people have made substantial gains on cryptocurrencies such as bitcoin, while others have made significant losses.
Until recently, there has been little guidance on the taxation of cryptocurrency (‘crypto’), although in 2014 HMRC suggested that if transactions were ‘highly speculative’ they would be exempt from UK tax like gambling winnings.
The prevalence of crypto has made this vagueness increasingly unsatisfactory, and HMRC has now published a policy paper providing clarity on its view of the tax treatment for individuals.
Despite its name, HMRC does not consider crypto to be currency or money for tax purposes - although it does recognise that it is accepted as a method of payment for goods or services online and even in pubs and restaurants. Instead, HMRC thinks that most people hold crypto as an investment, hoping it will grow in value.
With this in mind, HMRC now thinks that crypto should be taxed in all cases, in one of two ways:
i) Income tax
Anyone who trades crypto on a regular basis may be subject to income tax. The frequency in transactions, level of organisation and sophistication would be looked at to reach a conclusion on this.
If trading results in losses, they can be used to shelter other income, but it is likely to be difficult to convince HMRC that anyone regularly making losses is ‘trading with a view to profit’.
HMRC’s view on trading crypto is now therefore similar to its view on trading shares: it is possible, but in most cases, it will be challenged.
ii) Capital gains tax
In all other cases, capital gains tax will be due on crypto gains.
Since most cryptocurrencies are not traded in sterling, gains and losses must be converted into sterling to include on your tax return. Tax can be due on any disposal, including:
- sales for cash;
- exchanges of one type of crypto for another;
- using crypto to acquire goods and services; and
- giving away crypto to another person.
If a disposal gives rise to a capital loss, this can generally be set against any other capital gains made.
‘Negligible value claims’ can be made for crypto that has become worthless, but with certain limitations that may come as a surprise for some owners.
Losing public and private keys
Crypto requires a key to access it. If a private key is lost this is not considered a disposal as the crypto still exists. A negligible value claim could possibly be made if it can be proved that the key cannot be recovered and the crypto can never be accessed.
Due to its nature, investing in crypto may be vulnerable to fraud. Theft is not considered a disposal by HMRC and therefore no loss can generally be claimed . Similarly, if payment is made but no cryptocurrency is received, it may not be possible to claim a capital loss . On the other hand, those who pay for and receive crypto may be able to make a negligible value claim if it turns out to be worthless.
iii) Inheritance tax
Crypto is subject to inheritance tax as it is considered property.
In a short space of time, the number of cryptocurrencies and their use has expanded massively. Both the risks and the rewards involved with investing can be great, and HMRC now wants its share, in a sign that the world of crypto is maturing fast.