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Business Tax  •  Capital Gains Tax  •  Personal tax  •  Tax Planning  •  Tax Relief  •  Taxation

Dear Santa, I’m off chocolate, can you put bitcoins in my Xmas stocking?

By RJP LLP on 15 December, 2017

Virtual or crypto currencies, like bitcoin, are becoming an increasingly popular investment and many people, emboldened by recent surges in their values, are starting to consider investing. Forget chocolate money, it’s bitcoins that people are after this Christmas.

A handful of people have already become billionaires from their bitcoin investments. Flush from a financial settlement with Mark Zuckerberg after claims that that he stole their original idea for the social network, the US based Winklevoss twins invested $11m of their $65m payoff, to become the world’s first bitcoin billionaires when the currency gained in value this year.

Any readers who were risk averse enough or, like the Winklevoss twins, were quick to spot the investment opportunity, will have made a fortune in virtual currency. For those who sadly don’t fall into this category – ourselves included – we hope you’ll at least unearth some interesting information from this blog!

Apart from the growing interest amongst speculators, bitcoin’s value has also been boosted as a result of a growing awareness of its finite supply and due to established finance houses announcing the future availability of cryptocurrency-related products. Bitcoin has also slowly becoming more mainstream, with some shops and professional services providers starting to accept it. For example, PwC Hong Kong will accept bitcoin payment for advisory services.

Whatever your knowledge of bitcoin and where you can spend it, you will probably have seen the headlines about its surge in value. For anyone involved at the beginning, some serious sums of money have been made already and the value of a single bitcoin is now well over $16,000. This represents a 16-fold increase from the start of the year. Globally, the total value of all cryptocurrencies (there are hundreds of little known ones) has shot up to more than $390bn from a combined $17.7bn at the start of the year, according to cryptocurrency website CoinMarketCap.  And with surges in value, come profits and gains, which result in tax questions; hence our interest in the topic as tax specialists.


I’m a Bitcoin millionaire, do I pay tax on my gains?

Currently, no specific legislation exists concerning the tax treatment of gains made from cryptocurrencies, but that doesn’t mean there are no tax implications. Far from it. If you have made gains from bitcoin or other investments, there are two different scenarios and the level of tax liability stems from the way the currencies were originally acquired.


Scenario 1: Bitcoin mining

As opposed to just buying bitcoin with other currencies, "mining" is the process of creating fresh units of the digital currency. It works through a decentralised network (blockchain) system that allows computer users to calculate the complex algorithms and mathematical puzzles required to verify each transaction in the blockchain and be rewarded with bitcoins.

According to HMRC, mining bitcoins is classified as a trade. Profits are taxed as income after the deduction of relevant expenses, with both income tax and national insurance being payable. Income and profits need to be declared on a tax return, alongside all other income for the year. Any expenses claimed must relate wholly and exclusively to the trade of bitcoin mining.


Scenario 2: Buying bitcoin currency

The other way to obtain bitcoins is through a special bitcoin exchange, by purchasing them with a physical currency, such dollars or sterling. When bitcoins are bought on an exchange, this is regarded as an investment and gains are subject to capital gains tax. If the investor simply holds onto the bitcoins, no tax liability is triggered, but as soon as they are converted into another currency and the gain is realised, it becomes taxable. Current rates of capital gains tax are 10% for basic rate tax payers, rising to 20% for higher rate tax payers.

This applies whether the conversion is to a ‘traditional’ currency or another cryptocurrency. The reverse also applies, and any losses can also be offset against other gains. Any tax liabilities relating to profits made in the year to 5 April 2017 from either mining or investing in virtual currencies need to be reported to HMRC with any tax paid by 31 January 2018.

If you haven’t already sent us your personal information and income statements for the 2016-2017 tax year, please do so as soon as possible to avoid a last-minute rush. If you have any queries, please don’t hesitate to get in touch.

Otherwise, we wish you a very happy and relaxing holiday over the festive period and look forward to working with you again in 2018!







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31 July 2020 - Normally an important deadline!

All taxpayers due to make self-assessment tax payments on 31 July 2020 can now delay their payment due to the disruption caused by Coronavirus. This includes self-employed taxpayers and also company directors who pay self-assessment tax on dividend income.

Read more in our coverage of Coronavirus and business support from the Government.