Tax implications of investing in the Bitcoin

With the value of several crypto assets, most notably Bitcoin, have increased dramatically over the last few months, its natural for investors to be curious about investing strategies and traps. There was a widespread misperception that profits or gains from crypto-asset transactions are tax-free since they are considered gambling or lottery winnings.

This is not the case, and as with any other asset, there are various UK tax implications associated with the acquisition and sale of crypto assets.

How are bitcoins taxed in the UK?

Bitcoin is a new system of payment and the world’s first decentralised digital currency, also known as a “cryptocurrency”. The introduction of crypto currencies such as bitcoin is an innovative and developing area and their legal and regulatory status has not been established yet. Owing to their unique identity, cryptocurrencies cannot be directly compared to any other form of investment activity or means of payment.

Do i have to pay tax on bitcoin profits:

Profits gained from bitcoin price rises are subject to 20 per cent Capital Gains Tax – or 19 per cent Corporation Tax if it’s a company doing the trading. Any profits from bitcoin up to the amount of £6000 per annum are tax free as everyone has a capital gains tax free allowance of this amount for the year 2023/24.

Currently, the capital gains tax is charged at 10 per cent or 20 per cent depending on the level of the taxpayer’s other income.

For example, if you had purchased one Bitcoin three years ago for the value of £8316. As the current price of a Bitcoin has risen to around £27434, you have made a capital gain of approximate £19,118. Since the Capital gains tax allowance for the year 2023/24 is £6000, therefore you’ll be taxed on £13,118(£19,118-£6000) at 10 or 20%.

Although bitcoin transactions have been declared as illegal in some countries, and other countries have disallowed their banks from handling the currency, bitcoin is available to use in the UK. Consequently, there are tax impacts, too. Here, we will discuss the tax implications of bitcoins in the UK.

Bitcoin activity – just a hobby or trade?

Questions are now being asked about bitcoin activity, on whether this should be considered a hobby or trading. There have been several tribunal cases on the issue. It is important to mention here that a hobby does not fall within the ambit of the taxation system, but trading does. Hence, the labelling of bitcoin activity as either a trade or a hobby is going to be a determining factor in the consideration process of its tax position.

What are the tax implications on bitcoin activities in the UK?

The HMRC guidelines on the tax treatment of transactions relating to the sale or use of bitcoins and other similar cryptocurrencies are applicable for bitcoin (miners, traders, exchangers, payment processors and other service providers).

What is bitcoin mining?

As bitcoin does not operate under any central authority or bank, each and every transaction is recorded in a shared public account book called a ‘block-chain’. A change in ownership of a bitcoin must be registered for it to be effective. Every time a block is added to the block-chain, the user gets a number of bitcoins. This entire process is called ‘mining’.

Besides mining, bitcoin is also bought and sold, and exchange services are provided for parties to trade bitcoin with accepted currencies. Bitcoin may be used to pay for goods or services or held as an investment in places where it is accepted as payment.

Bitcoin’s growing popularity in the UK means an increasing number of transactions is taking place. This makes it necessary to think about the VAT, income tax, capital gains tax and corporation tax treatment of bitcoin activities, and therefore, all tax advisers must now understand this new mode of trading.

How is VAT on bitcoin treated in the UK?

Before the recent regulation, bitcoins and other virtual currencies used to be viewed as vouchers by HMRC and were therefore subject to VAT. However, due to the changeable value of bitcoins, HMRC has clarified its stand in HMRC Brief 09/14. The recently published HMRC guidance upholds that:

• incomes generated from bitcoin mining activities will usually be outside the ambit of VAT;
• miners’ income for other activities, for example, charges related to the confirmation of specific transactions, will not be subject to VAT because they fall within the definition of transactions, including negotiation, relating to deposit and current accounts, payments, debts, transfers, cheques and other negotiable instruments;
• there will be no VAT due on the amount of the bitcoins when bitcoins are transacted for sterling or for a foreign currency;
• Surplus charges on the value of the bitcoin for arranging or executing any transactions in bitcoin will be free from VAT.

For payment made with bitcoins for supplies of goods or services, VAT will be due in the standard way, based on the sterling value of the bitcoins close to the sale.

Defenders of bitcoin wanted HMRC to rethink their position that the cryptocurrency should be subject to VAT, therefore, the decision to exempt bitcoin from VAT comes as welcome news for many businesses.

The guidance provided by HMRC is thus temporary and may be subject to change. However, any alterations to the guidance will not come into effect retrospectively.

What are the different taxes concerning bitcoin in the UK?

In the case of activities concerning bitcoins and other cryptocurrencies, the taxes like income tax, corporation tax and capital gains tax transactions will hinge on the very activities taking place and the parties involved, in the similar way as transactions involving a normal currency, such as sterling, are decided.

No special instructions are there for income tax, corporation tax and capital gain tax for the transactions relating to bitcoins. Mentioned below are some relevant rules:

Corporation tax: The incomes and losses on exchange movements between currencies, that also cover virtual currencies, are chargeable as per the general rules on foreign exchange and loan dealings.

Income tax: Under general income tax rules, the profit and losses of a non-incorporated business will be chargeable.

Chargeable gains and losses: If a profit or loss on a currency agreement is within the loan dealing rules or not within trading incomes, it will be liable to tax or allowable for capital gains tax if received by an individual or, for corporation tax on chargeable gains if received by a company.

When payment for goods or services is accepted in the form of bitcoins, it is to be treated just as a payment made in sterling. There will be no change in the way taxable profits are calculated.

Bitcoin trading – CGT or income tax?

Even though bitcoins are regarded as a recent development, the guidance on badges of trade have existed since the 1950s.

The Royal Commission on the Taxation of Profits and Income, in June 1955, laid down the following main parameters to determine the badges of trade:

• the topic of the realisation;
• the duration of ownership;
• the number of similar transactions by one person;
• additional work on or in connection with the material goods realised;
• the circumstances in which the realisation took place; and
• purpose

Badges of trade will also be reviewed when the tax treatment of bitcoin undergoes a revision.

What needs to be done? – action points

• Tax advisers must accept and understand the activity of bitcoin from the beginning;
• Tax advisers just cannot ‘process’ the loss claims. The whole purpose, subject matter and circumstances of realisation have to be scrutinised. Evidence to support all claims is essential;
• Any bitcoin movement has to be examined on a ‘case by case’ basis, as do all sideways loss claims, which have to be dealt with on a ‘loss by loss’ basis. All loss claims must be substantiated by evidence and business plans.

Is it necessary for me to pay income tax and national insurance if I am paid in Bitcoin?

If you get crypto assets from your employer in exchange for services rendered in the UK, it is obvious that this constitutes earnings and that income tax and national insurance will be deducted in accordance with the value of what you receive. Cryptocurrencies such as Bitcoin, which have a tradable market, are referred to as readily convertible assets. This means that, similar to withholding taxes on a cash salary; the employer has the primary taxing responsibility. This can create administrative complications because the value of Bitcoin fluctuates, and some of the Bitcoin will need to be sold to pay a cash equivalent to HMRC. While some technology companies have paid their staff in this way, it is rarely more efficient than paying employees in cash.

If you are a self-employed consultant (i.e. not an employee) and receive Bitcoin in exchange for consulting services, the individual is responsible for reporting and paying income tax and national insurance contributions via their annual self-assessment tax return.

What should I do if I have failed to report Bitcoin sales correctly?

It is usually better to approach HMRC directly to rectify errors or omissions than to wait for HMRC to contact you. This will almost certainly result in reduced financial penalties (if applicable) and may also reduce the period covered by the disclosure.

While the proper method of the disclosure will vary depending on the circumstances, HMRC offers online disclosure options that are likely to be appropriate in most cases where a correction is necessary.

FAQs related to bitcoin tax implications in the UK:

Do I need to pay tax if I sell Bitcoin for a big profit?

Any tax liabilities relating to either mining or investing in virtual currencies which arose in the year to 5 April 2023 needs to be reported to HMRC with any tax paid by 31 January 2024.

Do you have to pay capital gains tax on bitcoins?

If you are personally involved in buying and selling Bitcoins, the gain (or loss) is subject to capital gains tax. The capital gains tax on bitcoin can be calculated using regular capital gains calculations.

When bitcoins are taxed as a Long-term gain?

If you sell bitcoin after owning it for more than one year, it is taxed as a long-term gain. Taxable rates on those gains range from 0 to 20 percent, with higher-income households paying the highest rate.

I have been gifted bitcoin, what will be the tax implications in this scenario?

You need to keep a note of the value of the gift on the date it has been received for tax purposes in the near future.

What if I have sold bitcoins to buy a property or flat?

In the given situation you might be liable to Capital Gains Tax (CGT). Make sure to keep the records of the purchase value of your bitcoin. You can also include transaction costs such as transfer fees when calculating your gain.

The annual tax-free allowance for an individual’s asset gains for the year 2023/24 is £6000. So if the profit from selling your bitcoin, in addition to any other asset gains, is not more than £6000, you are not required to report or pay tax on it.

In case you sell up to four times the annual allowance (£24,000 for 2020/21) of bitcoins, regardless of profit of less than £6000 or not, you must report it to HMRC. This can be done either by registering and reporting through Self Assessment, or by writing to them at below given address:

PAYE and Self Assessment

HM Revenue and Customs

BX9 1AS

United Kingdom

I have started trading bitcoin or sold bitcoin for some other crypto currency?

If you have started trading crypto or sold out some of your bitcoin for any other cryptocurrency you are required to declare yourself a trader to HMRC. Till you do not declare it, you will be considered an investor and your annual gains are subject to Capital Gains Tax as explained above.

In case you are having any query or want specialist advice on "Tax implications of investing in Bitcoin”, kindly request a call with us.

“This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction”.

Also See: Will Bitcoin Traders Be Taxed Under HMRC?

Also See: Complete guide on Directors Loans Accounts

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About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.