Cash or crash? Avoiding bitcoin blues

Fri 09 Mar 2018

Bitcoin and other cryptocurrencies (but for simplicity we’ll stick with bitcoin as the exemplar here) are attracting increasing attention and speculation and with increasing use come increasing risks of tax liabilities being missed or returned incorrectly which can lead to tax enquiries and penalties.
Whilst bitcoin is not officially recognised as currency or legal tender the practicalities of its uses are effectively similar for tax purposes, meaning that bitcoin:
• held as an investment or for non-business use is subject to capital gains tax;
• mined or dealt with and speculated in may be the subject of a trade or business; and
• used in a business, e.g. as the medium for selling and buying, can create business debits or credits.
Investments
Non-corporate bitcoin investors, including most speculators, will be subject to CGT on their currency gains and may generate losses for CGT purposes too.
For chargeable gain purposes any transaction in bitcoin held as an investment must generally be translated into sterling at the moment the transaction takes place.
Companies accounting for cryptocurrencies as intangibles are subject to the intangible asset rules unless they are dealt with under the loan relationship regime.
Bitcoin mining and dealing
Bitcoin may be the subject of a trade of dealing but for this to be the case the person claiming there was a trade would need to be able to show that the activity had enough of the attributes (“badges”) of a trade to be accepted by HMRC as a trade. The activity would have to be carried on on a commercial basis and if losses were to be claimable it would be necessary to show that the business was being conducted with a view to profit.
A bitcoin miner who could show that they were regularly engaged in mining with a view to profit, i.e. generating and selling bitcoin, could be regarded as trading, thus enabling claims for set-off of losses against other income but also opening up the possibility of NIC charges.
HMRC do not view bitcoin mining itself as the provision of goods or services and so mining is outside the scope of VAT but income received by miners for other activities including associated services may be VATable.

Bitcoin used in a business

If a business uses bitcoin as a means of transfer of funds or as the denomination in which it purchases or sells goods or services bitcoin cannot be adopted as a functional currency and all transactions need to be translated into sterling as at the time when the transaction takes place.

Valuation issues

Because of the volatility of bitcoin it is essential that all transactions in or involving bitcoin be time-recorded as accurately as possible. HMRC have made it known that they have devoted expertise to bitcoin valuation and may enquire into values returned. The CG34 post-transaction valuation check procedure is available for Bitcoin.