With little regulation and wild value fluctuations, you have to have nerves of steel to invest in a cryptocurrency. You also need to know how a cryptocurrency is taxed in the United Kingdom ...
With the dramatic increase in Bitcoin prices recently, a number of my clients who had previously invested in the cryptocurrency are now querying the tax treatment of their gains.
Bitcoin is the most well-known of several virtual currencies that exist purely online. It has its own value which can be converted into regular currencies like US dollars, Pound Sterling, Euros.
However, Bitcoins are not backed or authorised by any government, nor are they controlled by any central bank. Bitcoins are mined using an energy-intensive, highly-complicated mathematical hashing process.
As a payment method, Bitcoin is growing. Although many people love the idea of collecting it, if you want to use it to pay for something, you will have to search high and low to find retailers who accept it.
There are two types of Bitcoin owner. Bitcoin does not make a distinction between the two, but HMRC does. The type of owner you are will determine how you're taxed on it when you come to convert Bitcoin into Pound Sterling (or whichever currency you choose):
- There are Bitcoin investors – people who buy Bitcoin with the intention of sitting on them and selling them at a profit
- And there are Bitcoin miners – people who set up an infrastructure that is designed to mine new Bitcoins. A miner owns any Bitcoins they've produced
We'll look at the Bitcoin investor in this blog post.
Based on value at the time of writing, if you bought £500 worth of Bitcoin several years ago, your Bitcoin holding, when converted into Pound Sterling, is worth £1,000,000, which means you're now £999,500 up on the deal.
However, you will be charged Capital Gains Tax when you convert to another currency because you're charged Capital Gains Tax if you make more than £11,300 a year from the sale of most assets.
As an example, if you'd made no other income in the financial year in which you sold your £1,000,000 worth of Bitcoin, this is how you would be taxed:
- You would subtract the £500 cost of buying the Bitcoins and the £11,300 allowance from your profit of £1,000,000, meaning that the amount you'd be taxed on is £988,200 - Your first £33,500 would be charged at 10%, and the remaining £954,700 would be assessed at 20%, leaving you with a final Capital Gains Tax bill of £194,290
Limited companies would be subject to corporation tax on their gains, so if your company had purchased £1,000,000 worth of Bitcoins for £500, it would pay 19% of the profit on £999,500, equalling £189,905.
Of course, there is no VAT to pay if you buy, sell, transfer or convert your Bitcoin into standard currencies. However, if you do venture into the world of Bitcoin mining, you could claim back the VAT on your energy usage connected with the mining operation.
If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.