Ken Moody looks at the tax implications of Bitcoin and other cryptocurrencies.
Most investors in Bitcoin probably don’t consider what the tax implications are of their dealings, perhaps imagining that these are just a form of betting or gambling.
HMRC’s view on gambling
HMRC’s position on gambling is as stated in the Business Income manual (at BIM22015):
‘The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green [1925] 9TC309:
‘A bet is merely an irrational agreement that one person should pay another person on the happening of an event.'
HMRC's view on gambling
The HMRC guidance regarding Bitcoin dealings (Revenue and Customs Brief 9/14: ‘Bitcoin and other cryptocurrencies’), was issued on 3 March 2014, and states:
'As with any other activity, whether the treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies will be subject to CT, IT or CGT depends on the activities and the parties involved.
…. depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example, gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.’
Is Cryptocurrency considered income or capital?
Although Bitcoin is a virtual currency, it is an asset for capital gains tax purposes and ‘ordinary’ owners who acquire Bitcoin as an investment will realise a capital gain or loss when they exchange Bitcoin for traditional currency or for goods or services.
‘Bitcoin miners’ almost certainly are trading and owners who frequently buy and sell Bitcoin may, exceptionally, be regarded as trading.
Paying tax on Cryptocurrency
The only other relevant guidance as to whether corporation tax, income tax or capital gains tax applies may be summarised below.
(a) Corporation tax on Cryptocurrency
The profits or losses on exchange movements between currencies, including virtual currencies, are taxable. The general rules on foreign exchange and loan relationships apply. The profits and losses of a company entering into transactions involving Bitcoin would be reflected in the accounts and taxable under normal corporation tax rules.
(b) Income tax on Cryptocurrency
The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable/allowable on normal IT rules.
(c) Chargeable gains on Cryptocurrency
Gains and losses incurred on Bitcoin or other cryptocurrencies which are not within trading profits are chargeable or allowable for capital gains tax purposes if they accrue to an individual, or for corporation tax on chargeable gains if they accrue to a company.
For individuals who do not carry on a business which involves dealing in Bitcoin the default position, as noted, is that capital gains tax applies unless it can be argued that the transaction is ‘so highly speculative that it is not taxable’ being similar to gambling or betting.
Many investors have sophisticated investment strategies which do not rely solely upon chance, and It is difficult to see therefore how the profits on mainstream cryptocurrencies including Bitcoin could be seen as gambling profits.
Is buying and selling Cryptocurrency considered trading?
Normal principles of tax law must apply in distinguishing whether buying and selling Bitcoin is regarded as a trading or investment activity, including consideration of whether of whether the so-called ‘badges of trade’ are present.
In Ali V HMRC [2016] SFTD 335; [2016] UKFTT 8 (TC)the First-tier Tribunal (FTT) was persuaded that Mr Ali’s share dealings amounted to a trade. The taxpayer was a pharmacist who since the 1990s also engaged in buying and selling listed stocks and shares with the intention of making profits from short-term price movements. He spent up to 40 hours per week on this activity, but did not succeed in making overall profits and claimed the losses against his other income.
HMRC had disallowed the losses on the basis of previous case law that speculative dealing in stocks and shares did not amount to carrying on a trade. The FTT disagreed. The taxpayer's share activities bore many classic hallmarks of trading. On balance, the badges of trade (the length of the period of ownership, the frequency or number of similar transactions by the same person, the circumstances that were responsible for the realisation and the motive) supported a finding of trading.
Practical Cryptocurrency tax tip
However, it seems very unlikely that HMRC would argue that profits from dealings in cryptocurrencies should be treated as trading profits as a matter of policy, unless the circumstances were very exceptional. This is for the obvious reason that if profits from such dealings are taxable as trading profits, it follows that trading losses would be relievable against other taxable income.
