The “not so simple” taxation of Bitcoin

Imagine this: Your student son has started using Bitcoin. Now he tells you he’s done quite nicely buying and selling. So to prove you’re older and wiser, is there some good advice you can give him about the tax consequences? What does HMRC say about Bitcoin?

HMRC’s view on cryptocurrencies is given in Brief 9/2014, which covers VAT, corporation, income and capital gains tax (CGT). It said it would issue further guidance as and when because cryptocurrency was a “new and evolving area” . So far, HMRC has said nothing further since 2014. It says that cryptocurrencies “have a unique identity and cannot be directly compared to any other form of investment activity or payment mechanism.” This means the tax position needs to be “looked at on a case-by-case basis taking into account the specific facts” .

Three possibilities

In HMRC’s eyes buying and selling Bitcoin can fall into one of three classifications:

  • short-term speculating – like gambling or betting wins. This means it’s not taxable, neither can you get relief if you make a loss
  • buying and selling with the intention to make a gain – if trading profits are liable to income tax and losses are tax deductible. HMRC looks for trends that point towards trading, for example a high volume of transactions in a short space of time, but this isn’t conclusive by itself)
  • occasional investments – gains and losses made from buying and selling are within the scope of CGT and will be taxed or relief given according to the usual rules. Capital gains and losses on Bitcoin are chargeable or allowable for CGT (for individuals) and for corporation tax (for companies).

Capital gains tax – how is it valued?

HMRC says that if precise valuation of Bitcoin for tax purposes isn’t clear, its valuation office will give its view of the value to be used for working out gains and losses. You can apply using Form CG34 post-transaction.

Bitcoin mining

Bitcoin mining is a different ballgame. HMRC will definitely consider the activity as a trade and might lump in any profits and losses from buying and selling the currency. HMRC considers Bitcoin mining as outside the scope of VAT, which means money received by miners for making a Bitcoin deal is exempt. If Bitcoin is exchanged for other currencies, no VAT is due on the value of the transaction.

HMRC will usually categorise buying and selling as within the scope of capital gains tax (CGT) or a trade. The former is more likely which is good news as exemptions and low CGT rates make it more tax efficient. Bitcoin mining is a trade and profits and loss will be taxed and relieved as income.