Bitcoin, Litecoin, Ethereum and many more, make up the growing cryptocurrency world. As with any form of currency, commodity or shares these can be utilised to purchase certain goods or services but can also be traded, which appears to be an increasingly popular investment choice.
Dependent on the specific situation and the individuals intentions there could well be a liability to taxation or indeed none at all. Below we have highlighted the main three categories in which this type of investment may fall.
1. Own use: If the currency is acquired for your own use, spent as required, and then converted back into Sterling then no taxation implications exist. This would be like changing Sterling to Euros for a holiday, and then changing back however much was left over at the end of a holiday. Therefore, there is no relief for losses and no tax payable on gains.
2. As an investor: If you buy currency, crypto or otherwise, with the intention of holding on to it for a prolonged period, months or years normally, then any increase in value would be deemed to be a capital gain. Capital Gains are payable on an arising basis, so when one currency is sold/converted then that would crystallise the gain. The first £11,300 made in capital gains during a tax year are tax exempt, thereafter they are chargeable at 10% or 20% depending on your overall income levels.
3. As a trader: If you buy currency with the intention of making a profit on it, and are trading in currencies often, perhaps weekly, or biweekly, then it would be likely to be considered a trade by HMRC, and they would anticipate accounts being prepared under normal accounting rules. This would entail looking at the value of the assets at the accounting year end, and charging any profits to tax and National Insurance. This could be at 0% where covered by your personal tax allowance, 20% (up to £45,000), 40% (from £45,000 to £150,000) and 45% (over £150,000) for taxation, and 0% (up to £8,164), 9% (£8,164 to £45,000) and 2% (over £45,000) for National Insurance. If your income exceeds £100,000 then you would also lose your personal tax allowances.
The line between being an investor and being a trader can often be unclear, and can cause issues with HMRC, though worse still can happen if the position is entirely ignored.
If, for example, it was declared on a Tax Return as a capital gain and the facts were equally in favour of either position, then HMRC and the Tribunals will likely agree with how it has been declared. If, however, nothing is declared and HMRC discover the sales, then their initial stance would normally be one of trading, as this gives the larger tax take, and would charge greater penalties and interest on the amount underpaid to them.
This is a very brief insight into the potential tax implications associated with cryptocurrency. For further details or to arrange a free initial consultation please feel free to contact us.
This guidance is published for general guidance and therefore without responsibility on our part for loss occasioned to any person acting, or refraining from action, as a result of any information published herein.