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HMRC  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning  •  Tax Relief  •  Taxation

The tax treatment of cryptocurrency: Understanding HMRC’s new guidelines

By RJP LLP on 23 September, 2019

The initial ‘Cryptocurrency Bubble’ may have burst since the early days when people were collecting bitcoins and becoming virtual billionaires, but this remains a very interesting investment area for taxpayers who are prepared to make riskier investments.

They come with a clear warning of caution. Bank of England Governor Mark Carney has declared them inherently dangerous and said that they demonstrate “the classic hallmarks of bubbles”, but that hasn’t deterred Facebook.  They recently announced that the company will launch its own cryptocurrency, Libra, sometime in 2020. A strange strategy U turn after banning ads for cryptocurrencies on the social media platform last year.

For those who are still keen to invest and are wondering how to manage gains and losses on virtual currencies for tax purposes, this article explains how cryptocurrencies are taxed.

HMRC has recently issued new guidance, explaining how they regard virtual currencies. It is clearly becoming more popular as an investment, because there are now more than 2,500 cryptocurrencies listed on various currency exchanges.

Here’s HMRC’s position on virtual currency and tax, providing existing and would-be investors with a handy summary of the rules.

How are virtual currencies taxed?

Cryptocurrency assets are regarded as financial assets, just like stocks and shares. This means gains are subject to capital gains tax (CGT) and losses may be used to offset gains. Gains may arise when crypto assets are sold for cash, exchanged for another crypto asset or used to buy other assets with a value. Trading on currency exchanges is therefore an activity that may give rise to tax liabilities.

Just like other assets, crypto assets can be given away. They are considered to be property for the purposes of inheritance tax and will form part of an individual’s estate. Gifting virtual currencies can be complicated and although they meet the criteria for lifetime gifts and potentially exempt transfers, we recommend taking specialist tax advice because of their volatility. Gifts between spouses are always tax free, as with other types of assets.

Trading in cryptocurrency is not regarded as gambling, for which gains can be made tax free. This was previously unclear because of the high risks associated with cryptocurrency trading. Many people had assumed this type of trading would be classed as gambling, but this has since been clarified by HMRC and investors should be aware.

Regular trades in virtual currencies by an individual may result in the activity being classified as a financial trading activity, with gains being regarded as income rather than capital gains for tax purposes. If this is the case, a taxpayer may need to pay income tax and national insurance rather than capital gains tax, with the rates set according to the individual’s total income levels. This could mean a significantly different tax liability, since CGT would be charged at either 10 or 20%, whereas income could be taxed at over 40% - plus there will be NICs to pay.  If you think you might fall into the investor category, it is worth taking professional tax advice to understand the tax implications well in advance.

For pension investment purposes, HMRC has confirmed that they do not consider crypto coins to be currency like sterling and therefore no tax relievable pension contributions can be made using cryptocurrency. The same applies for ISAs.

The other tax legislation surrounding crypto assets is still immature and there are a number of grey areas. For instance, the location where cryptocurrencies are held for tax purposes is debatable and there is no clear direction as yet on how companies holding crypto assets are to be taxed.

How to deal with losses and lost cryptocurrency for tax purposes

Losses are something that anyone who is dealing in cryptocurrency needs to understand – their volatility means this is a highly probable scenario for most investors at some point.

If an individual makes a loss after disposing of crypto assets, they can offset this loss against any capital gains made during the tax year, after taking into consideration the annual CGT exemption of £12,000. Excess losses can be carried forward indefinitely and offset against future gains as they arise.

Just as with shares, if a cryptocurrency becomes worthless, it is possible to make a claim to HMRC that it has become of ‘negligible value’. This is done at the same time as reporting the loss.

If crypto assets are lost or stolen – for instance, if an exchange is hacked or if an investor loses the keys – this does not qualify as a disposal, because the assets still exist as part of the cryptography and the individual may be able recover them. If there is no chance of recovery it may be possible to make a negligible value claim with HMRC and then offset the losses. Again, this is complicated and specialist advice is needed.

If you would like specialist capital gains tax advice, on cryptocurrency or any other assets, contact partners@rjp.co.uk

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