Posted on: 14th March 2018
How are profits made from trading cryptocurrencies taxed in the UK?
Recent months have seen high price volatility in the cryptocurrency market. But even JP Morgan boss Jamie Dimon has said that he regrets calling Bitcoin a “fraud”; now saying that he believes that blockchain technology is “real”. Cryptocurrencies and the technology that underpins them are here to stay in one form or another; and those trading or investing in cryptocurrencies are well placed to reap the rewards.
If you’re a trader of cryptocurrencies do you know how the profits you earn from trading cryptocurrencies are taxed in the UK? You may be pleased to know that whilst HMRC issued a briefing in March 2014, they haven’t laid down any new tax rules relating specifically to cryptocurrencies.
You can read HMRC’s briefing here:
If you’d like a quick synopsis, please read on.
The briefing recognises that cryptocurrencies cannot be compared directly to any other form of investment activity or payment mechanism.
For businesses receiving cryptocurrencies as payments for goods and services, there is no change to how taxable profits are calculated. However, unless a financial trader is in business providing services to clients, for which they receive payment in one cryptocurrency or another, HMRC’s statement confirming that there is no change to how taxable profits are calculated is of little relevance to the independent financial trader.
For the independent financial trader the question is whether profits made from trading cryptocurrencies are liable to Income Tax (IT) as self-employment income, Capital Gains Tax (CGT) or not taxable. Profits from the trading of cryptocurrencies will not be taxable where the transactions entered into are so highly speculative that they are deemed to be similar to gambling.
The paragraph in HMRC’s briefing which most relates to the type of activities carried on by independent financial traders is the following:
“Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts. Each case will be considered on the basis of its own individual facts and circumstances. The relevant legislation and case law will be applied to determine the correct tax treatment. Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.”
So, how do you tax profits made from the trading or investing of cryptocurrencies? As with any other financial instrument an independent financial trader trades, there is no specific tax legislation stating how profits made from the trading of a particular financial instrument should be taxed. As stated in HMRC’s briefing, HMRC will look at each financial trader on a case-by-case basis in order to determine their tax status. The financial trader’s tax status will be determined by HMRC to be one of the following:
- A self-employed activity, liable to Income Tax;
- That of a private investor, liable to Capital Gains Tax; or
- Speculative in nature and similar to gambling, such that profits are not liable to tax.
Providing a case-by-case representation of our client’s circumstances and obtaining written confirmation from HMRC, as to their tax status as an independent financial trader, is exactly what we do at Decipher Tax. If you would like to find out more about the work we do and how we can help you, please give us a call on 0203 6376416 or drop us an email at firstname.lastname@example.org