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.
"But first, what is a cryptocurrency?"
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.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about how a cryptocurrency is taxed, call me on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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