Bitcoin - A Winning Gamble

Richard Urron, tax partner at RSM in Newcastle, considers whether HMRC could be the biggest winner from Bitcoin investments.

It has been nearly a decade since Satoshi Nakamoto’s white paper was issued and Bitcoin entered the world. Bitcoin has been dismissed in the past as something used by the criminal underworld, however its popularity is now seemingly surging with ordinary investors.

This is not entirely surprising given some of the eyewatering increases in value over the last year. For example, those who made an investment of £1,000 on 1 January 2017, would be looking at a gain of £12,870 a year later, peaking at £14,354 on 17 December 2017.

Almost foreshadowing the volatility and drop in value from mid-December was the warning from Andrew Bailey, CEO of the Financial Conduct Authority. In an interview with the BBC Andrew stated that ‘buying Bitcoin carried a similar level of risk to gambling’ and that ‘if you want to invest in Bitcoin, be prepared to lose all your money’.

Despite that warning and a lack of regulation, the interest in cryptocurrencies does not appear to be slowing. Indeed, the fact Bitcoin is unregulated has perhaps contributed to the growing interest, as it has led to the emergence of trading platforms making it easier than ever for individuals to become cryptocurrency traders.

How will Bitcoin gains be taxed in the UK?

With this increase in cryptocurrency activity, HMRC will be looking forward to its slice of the cake if big gains are made on Bitcoin or other cryptocurrency trades. How any such gains are taxed will depend on how the Bitcoins were acquired in the first place. For most of the new generation of investors, the Bitcoins will have simply been purchased via online exchanges.

For these investors, it is likely that the normal Capital Gains Tax (CGT) rules will apply. In simple terms, CGT is the tax payable on the profit of an investment, meaning it is the gain on the investment that is taxed and not simply the amount received.

As an individual, you can have gains up to the ‘annual exemption’ limit (currently £11,300) in a tax year before any CGT will be due. This assumes, however, that you do not make any other capital gains in the same year. For gains over the annual exemption, CGT will apply at a rate of either 10 per cent or 20 per cent depending on whether you are

a basic or higher rate taxpayer. Corporate Bitcoin investors will instead be subject to corporation tax.

What about miners and frequent traders?

Those more familiar with cryptocurrencies will be aware that as well as purchasing Bitcoin, they can be earned by certain users, called miners, who verify transactions and add them to Bitcoin’s public ledger (the ‘blockchain’).

Miners are likely to have their profits subject to income tax, as could those who buy and sell frequently as Bitcoin traders. This is due to it being more akin to profits arising from a trade rather than an investment return. The normal trading rules will apply in these circumstances and advice should be sought due to the more complex rules that can apply when calculating the tax due.

What about losses?

Whilst it might be expected that HMRC will want gains and profits relating to Bitcoin and cryptocurrency trading to be taxed and declared on tax returns, the position on losses is less clear. Some investors employ stop-loss strategies, basically a means of triggering a sale of their cryptocurrency at a set price, to limit their losses. Others steer away from this, arguing that the lack of regulation leaves stop-losses open to market manipulation by those who control large amounts of the cryptocurrency, accepting the risk of large losses as highlighted by the recent plunge in Bitcoin values.

Regardless of what approach an investor takes, HMRC has outlined in its guidance that the taxation of cryptocurrency trades should be reviewed individually on a case-by-case basis. HMRC also refers to the fact that ‘highly speculative’ transactions might not be taxable at all as they are similar to gambling winnings or losses (which are not taxable or relieved).

Whilst this would be good news for a ‘winning’ gamble, there is a risk that if a big loss is made on a cryptocurrency transaction, HMRC would argue that the transaction was so speculative that no tax loss is allowed. So if, as Andrew Bailey says, your Bitcoin investment is more like a gamble and it goes wrong, don’t expect too much sympathy from HMRC.