Do you have to pay Taxes on Bitcoin UK?
Capital Gains Tax is payable to HMRC on Bitcoin profits in the UK.
Taxes on Bitcoin are calculated similar to shares.
What is Bitcoin?
Before we get into the detail on how and when to pay Taxes on Bitcoin, it is important to know what Bitcoins are?
Bitcoin is a type of cryptocurrency. There are numerous different types of coins but for this article we will refer to all coin types as Bitcoin as these are the most well-known.
Bitcoin is a digital form of currency. Like £ sterling they are intended to be used as a form of payment for goods, services or to transfer money.
Pay Taxes on Bitcoin?
Although Bitcoin is a form of digital currency, HMRC does not consider it to be a currency or money.
Typically, individuals hold Bitcoin as a personal investment, in the hope of capital appreciation.
As a result, when Bitcoins are disposed of Capital Gains Tax rules will apply.
Pay Income Taxes on Bitcoin?
Only in very exceptional circumstances would Income Tax be payable.
Individuals would need to buy and sell Bitcoin on such a regular occurrence, with such a high level of organisation that HMRC deem a trade to be taking place.
As a result most trading in Bitcoin is Taxed under the same rules of shares and securities. Which is Capital Gains Tax.
Pooling of Coins
The Tax treatment of cryptocurrencies, are very similar to that of shares and securities. To make the calculation easier these assets are pooled by type.
Individual investors who own 3 different types of coins. Such as Bitcoin, Litecoin and Ethereum will have 3 pools.
By pooling the coins, the total price and total coins held is readily available.
For example, an individual purchases 10 Bitcoins for £2,000. A few years later they make another purchase of Bitcoins, this time purchasing 3 Bitcoins for £15,000. By pooling the transactions the total cost is £17,000 for 13 Bitcoins.
Should this individual dispose of say 5 Bitcoins for £40,000 the profit would be as follows:
- Proceeds received £40,000
- Cost of Sale £6,538 (Calculated as £17,000 x 5 / 13)
- Profit would be £33,462 – this would be subject to Capital Gains Tax
Purchase Bitcoin within 30 Days of Selling
Purchases aren’t always pooled.
The 30 day rule which applies to shares and securities also apply to the disposals of Bitcoin. (And other Cryptocurrencies).
Should you purchase a coin on the same day or within 30 days of a disposal, those coins are deemed to have been sold first. They are not pooled.
For example using the same figures above we have a pool of 13 Bitcoins costing £17,000 and a disposal of 5 Bitcoins for £40,000. However, 20 days after the £40,000 sale, a further purchase of 2 Bitcoins were made for £11,000.
The calculation must be split into 2 separate sales.
The non-pooled sale would be as follows:
(2 out of 5 Bitcoins sold)
- Proceeds received £16,000 (Calculated as £40,000 x 2 / 5)
- Cost of Sale £11,000
- Profit would be £5,000 – subject to Capital Gains Tax
The pooled sale would be as follows:
(3 out of the 5 Bitcoins sold)
- Proceeds received £24,000 (Calculated as £40,000 x 3 / 5)
- Cost of Sale £3,923 (Calculated as £17,000 x 3 / 13)
- Profit would be £20,077 – subject to Capital Gains Tax
As a result, the total profit would be £25,077. There would also be a pool of Bitcoin to carry forward of 10 Bitcoins (13 Bitcoins less 3 Bitcoins sold) with a cost of £13,077 (Original cost of £17,000 less cost of sale of £3,923)
TIP: The 30 day rule is an important consideration for investors. Many investors may sell when the price peaks, only to buy back a few weeks later when the price drops. If the few weeks is within the 30 day period the Tax calculation will change. It may even be beneficial to buy within 30 days (if the original pool purchases were very low), but Tax planning must be considered in any event.
When does a Disposal Take Place?
The price of Bitcoin fluctuates constantly. Investors whom hold Bitcoin will know only too well the rollercoaster of profits and losses which can be made.
The hourly and daily movements are irrelevant. An investor will only pay Taxes on Bitcoin when a disposal has deemed to take place.
A disposal typically consists of either of the following events occurring:
- Sell Bitcoin for money
- Exchange Bitcoin for another type of cryptocurrency
- Use Bitcoin to pay for goods or services
- Give Bitcoin away to another individual (who is not spouse or civil partner)
TIP: Many investors switch from 1 coin to another coin on a regular basis. In fact many Alternative Coins known as ‘Altcoins’ can only be purchased using a mainstream coin such as Bitcoin. As a result these exchanges are a Taxable event and Capital Gains Tax should be calculated.
Pay Taxes on Bitcoin Future Predictions
Bitcoin and the other cryptocurrencies are in their infancy. As a result HMRC and the Tax authorities around the world aren’t quite sure how to Tax these digital assets.
The current rules in the UK are to treat them similar to shares and securities. This is the closest fit to what HMRC rules already exist.
As Bitcoin develops and becomes more popular we foresee that these Tax rules must change.
Using Bitcoin in a shop or online could become as popular as buying items off the internet. As a result it would be impossible to have a capital gain event arising on every single one of these transactions. Therefore the Tax rules would need to be changed.
Pay Taxes on Mining?
Each time a digital transaction takes place it must be authenticated. As a result digital assets such as Bitcoin require a lot of computing power.
The necessary computing power required is provided by miners. In return for providing the computing power miners have the chance of earning a reward. The reward is typically a free cryptocurrency such as a Bitcoin or ‘Altcoin’.
This is known as mining.
Although the coin is received for free. Tax is chargeable on the market value of any coin received.
Mining activity could be a Taxable trade if there is a significant amount of organisation and activity taken place. For example there are some industrial units (especially in Asia), which have rows and rows of computers all data mining for cryptocurrencies. This would be a trade in the UK.
If the mining activity is not a Taxable trade it is Taxed as miscellaneous income on the Personal Tax Return.
In both cases any relevant costs associated can be deducted against the income. Typically the main cost would be the computers and the electricity required to power them.
Should the individual retain the Bitcoin (or other coins) a Capital Gain would also be chargeable on the future disposal.
To ensure that individuals pay Taxes on Bitcoin correctly it is important to maintain records.
The information which must be kept as a minimum for every transaction is as follows:
- Type of cryptocurrency (i.e Bitcoin)
- Date of the transaction
- Whether it was a purchase or a sale
- Number of coins purchased
- The cost or proceeds in £ sterling
- Cumulative total of each cryptocurrency held
- Bank statements to prove purchase and sale amounts (in event of enquiry)
- Digital wallet addresses (in event of enquiry)
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