Article by Charl Stander
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Cryptocurrencies has been one of the top areas of discussion in the past few months, especially after the big rise in the price of Bitcoin around December 2017. Bitcoin surged from around £700 to a peak of over £14,000, this is over 2000% gains. Many people made a fortune with Bitcoin during this time! The questions the public and the government sits with is: “If Bitcoin is seen as a currency, maybe not for all people, but definitely for some, and if Bitcoin has given so much people an extra income and capital gains, how will it be regulated under law and should it be taxed?
Firstly, we discuss three of the many similarities’ cryptocurrencies have to other traditional fiat currencies:
- In the crypto market, you also have fluctuating exchange rates which are driven by the market.
- You can buy and sell cryptocurrencies in exchange for other cryptocurrency or for ‘normal’ currencies, such as the Great British Pound (GBP).
- Transactions via cryptocurrencies can be made online via the internet.
Cryptocurrency has become extremely popular as stated above. The popularity can be connected to the new technology which has almost infinite possibilities namely blockchain, it is also not manged by any banks
You can trade cryptocurrency via different platforms both on and off the normal web. If you are buying cryptocurrencies in the UK on the regular web via a standard browser such as Google, from what you perceive to be a reliable source, you will be subject to money laundering checks under UK rules. If you buy cryptocurrencies on the dark web, which is not advised, ID checks can be almost non-existent however, depending on how you set up your transactions on of the risks of some dark web merchants is that you run the risk that you might lose your money.
Generating revenue by using cryptocurrencies such as Bitcoin through investing and trading in the crypto market and on multiple exchanges, has become a new technique of making a profit, some may even consider it as a new job. Currently in the UK, income derived from virtual currency such as profits from the transfer of assets, income from a job and business is taxed on a related principle as income derived from traditional money, this will be expanded on during this article.
We know that as regards to the taxation of digital profit, the investment or derived income from a cryptocurrency is usually uncensored and unanimous due to the nature of the cryptocurrency technology, but has to be transformed into fiat on the exchange at this moment in time to be of any use due to not a lot of places accepting crypto payments yet, this is usually done at the exchange rate of the virtual currency on that specific date. This is where the tax came in for a lot of people, although the assets held on digital platforms should also not be overlooked. The part of the profit or loss usually depends on whether the digital currency is an asset in the hands of the people. People commonly recognize profit or loss on a transaction or exchange of virtual currency that is a capital asset. For example, stocks, bonds, and other investment holding are usually capital assets, thus cryptocurrencies can be seen as similar.
So, who is regulating this?
Her Majesty’s Revenue and Customs (HMRC), a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage, has already published a guideline about UK crypto taxation. They also stated: “We will not hesitate to use the powers Parliament has made available to us to identify those who are intent on evading tax.” They referred here to the tax evasive behaviour connected to cryptocurrencies.
Coming back to the UK specifically regarding the HMRC. The HMRC sets the revenue and customs policies and is also responsible for the UK crypto taxation The HMRC does not currently recognise Bitcoin or any other cryptocurrency as a currency, however crypto assets are intangible assets and appear to fall into s.21(1)(a) of TCGA 1992.
This means that disposal proceeds are taxed as capital gains, unless there is evidence of trading. We will see now that traders will be taxed for income.
According to HMRC policy paper, any crypto profits made are subject to the same taxation as a normal salary such as income tax and national insurance augmentation. It has also recognized that cryptocurrencies may be kept as a property or utilized to pay for goods or services at traders where they are received. In the UK, there are already a number of terminals, such as bars, eateries and internet retailers, that take payment by cryptocurrency.
…any crypto profits made through are subject to the same taxation as a normal salary…
The HMRC guideline is thus only applicable for people who are earning profits or contrarily earning income from cryptocurrencies, in whatever manner. The following list is examples of different ways people are earning profits from the leading cryptocurrency namely Bitcoin:
- Bitcoin mining
- Bitcoin trading
- Bitcoin exchanges
- Bitcoin payment processing
- Other Bitcoin service providers
Broadly speaking, cryptocurrency traders will be held liable to income tax whereas non-traders, investors, miners, everyday people who buy and sell the coins, will be liable to capital gains tax. If you’re confused, or unsure under which class you are held liable, here are some key differences between trading and investing in the cryptocurrency space. Some of these activities may be very hard to place into one of the two categories such as mining but has been placed according to the nature of the activity itself.
Trading or investing crypto assets?
Actively mining Bitcoin
Making multiple trades buying and selling cryptocurrencies
Buying cryptocurrencies and holding your investment for long periods of time and maybe later selling
Obviously not all examples are covered above. It is clear that tax would depend on particular circumstances.
VAT treatment appertaining to Cryptocurrencies:
Although cryptocurrencies are not tax-exempt as we saw above, they are well vat exempt. Here is a short summary of tax vs VAT:
Value Added Tax is a form of indirect tax that is imposed at different stages of production on goods and services.
Tax, most commonly known as sales tax, is the percentage of revenue imposed on the retail sale of goods.
Unlike VAT, TAX is levied on the total value of goods and services purchased.
Due to the fact that there is an inadequate connection between any assistance furnished and any payment received with cryptocurrency mining, the revenue derived from cryptocurrency mining exercises are outside the scope of VAT. This is due to the activity not forming a commercial activity. Revenue earned by crypto miners for other ventures like for the affirmation of particular transactions are spared from VAT under Article 135(1)(d) of the EU VAT Directive.
When cryptocurrency is traded or exchanged for other fiat currencies such as GBP, no VAT is payable on the value of the cryptocurrency, but nevertheless, in all cases, VAT is payable for any goods or services traded in exchange for any cryptocurrency such as items at a store.
Hopefully, after reading this article, you will have a better understanding between TAX and VAT and also have clear knowledge on whether the activities you are performing regarding cryptocurrencies is TAX and VAT exempt also which type of tax they include.
None of the information stated in this article should be taken as absolute truth. The financial sector is changing drastically and can make any of this information redundant at any moment in time. The information in this article should not be interpreted as an endorsement of any cryptocurrency. It is not a recommendation to trade virtual currencies. It is also advised to research more on these topics before making any financial or other decisions regarding this topic.