Bitcoin Taxes in the UK

19th December 2018

In our previous article, we discussed the taxation in both general and international terms. That article is recommended reading for UK residents, as it touches upon the pros and cons of reporting vs. not reporting crypto activity to the taxman. The article also deals with the agreement reached between major nations at the recent G20 regarding Bitcoin regulation and taxation; changes which may eventually filter through to affect how Bitcoin is taxed in the UK.

Our readers from the United Kingdom, and elsewhere, may also find our recent article on how Brexit may affect Bitcoin to be of interest.

(Crypto) Anarchy in the UK? Hardly

Bitcoin anarchy in the UK

The UK has been fairly ahead of the international curve in terms of regulating Bitcoin. In March of 2014, Her Majesty’s Revenue and Customs (HMRC) released its policy paper on Bitcoin and other cryptos. This document forms the legal basis for Bitcoin taxation within the United Kingdom. It also demonstrates that the UK government has at least a rudimentary understanding of Bitcoin’s “block-chain” and other technological workings.

The paper applies to miners, traders, investors, and businesses. It details how Bitcoin is to be handled under existing taxation laws, including Income Tax (IT) and Capital Gains Tax (CGT). How these particular taxes are applied to Bitcoin will be discussed under the “Trading” and “Investment” subheadings under the following “Bitcoin’s Legal Classification in the UK” section. These two sections are most relevant to individuals and will apply to the majority of cases.

One positive item to note in the policy is that individuals who receive Bitcoin or other crypto from activities unrelated to trading or investment, such as gambling, betting, or hobby activity, will not be taxed on it. However, the HMRC will have to specifically approve such cases.

Value Added Tax (VAT) is also covered in the HMRC document, although the good news here is that neither tax is applied to Bitcoin for miners or traders. To clarify, VAT is not charged when Bitcoin is exchanged for other forms of money (such as when buying BTC from Coinmama). However, when goods or services are provided in exchange for Bitcoin (or other cryptos), VAT is to be added to the price as per usual.

As for Corporation Tax (CT), incorporated companies should treat Bitcoin transactions in the same manner as they would when receiving or dispersing foreign currencies. In other words, trading income will be taxed as per CT on Profit and Loss Account under UK GAAP (Generally Accepted Accounting Principles) rules. Capital Gains will be taxed under CT rules governing same.

Forthcoming Tax and Regulatory Changes

Most recently, the government declared that Bitcoin is unregulated and should be considered in the same vein as “foreign currency” in most instances, such as for Income Tax and Corporation Tax purposes.

The HMRC stated in early 2018 that tax obligations will be reviewed on a “case-by-case” basis when the matter is unclear. They also issued a warning against tax evasion, stating that they will use their full legal powers to identify evaders.

There are no specific tax regulations which pertain to Bitcoin or crypto at this time. However, the UK Treasury has announced that it is working on legislation which will harmonized the treatment Bitcoin and crypto with existing monetary law, such as Anti-Money Laundering and counter-terrorism rules.

Bitcoin’s Legal Classification in the UK

The Bitcoin tax situation in the UK

The UK views Bitcoin through 2 different legal lenses, depending upon how frequently one transacts with it and for what purposes. We have no particular insight on how frequency is assessed or how purposes are decided. UK tax law is unfortunately vague on this issue. If you’re unsure which category you’re likely to be taxed under, we suggest consulting with a tax professional.

For now, here’s how each category works:

1) Investment

In most cases, the UK will classify Bitcoin and other cryptos as an investment, similar to stock holdings. What this means is that Capital Gains taxes are applied to any profits realized.

In other words, when you sell bitcoins at a profit, you will be liable for Capital Gains taxes if your total gains exceed the current tax-free allowance (known as the Annual Exempt Amount) of £11,850.

Under existing CG laws, a maximum of 20% of your profits may be liable for taxation if the extent of your income places you in the “Higher rate” or above bracket.

If you are in a lower bracket, the procedure to work out your Capital Gains liability is more complexbut won’t exceed 10%, provided you stay within a certain threshold.

The Income Tax brackets, or “bands,” are defined as follows:

Bracket Taxable income Tax rate
Personal Allowance Below £11,850 0%
Basic rate Above £11,851 but below £46,350 20%
Higher rate Above £46,351 but below £150,000 40%
Additional rate Above £150,000 45%

 

Based on these brackets (which are liable to change in the new tax year, which begins in April of 2019), it might make sense to only convert as much crypto to fiat as absolutely necessary in each tax year. This way, you won’t exceed the maximum threshold for your bracket and incur a higher tax burden. Remember, you can’t be taxed on crypto earnings until you realize them!

Some further good news regarding Capital Gains tax is that any Bitcoin losses can be deducted from your overall tax obligation in most cases. Other losses may also be deducted against your Bitcoin gains and you may also claim relief. Again, HMRC reserve the right to treat cases on an individual basis.

 

2) Trading

For those who frequently trade between fiat and crypto or between various cryptocurrencies, Income Tax may apply instead of CG. Similarly, those who receive Bitcoin or crypto for goods or services will have to report it under the rules governing Income Tax; namely the UK GAAP (Generally Accepted Accounting Principles) rules. Each qualifying transaction would then be classed as a taxable event and be taxed according to this existing IT framework.

The same Annual Exempt Amount tax allowance applies to IT as on CG; gains below £11,850 are exempt. This exemption figure may be raised if you claim Marriage or Blind Person’s Allowance, as well as for the first £1,000 you earn from self-employment (including crypto trading, presumably) or rental income.

However, if your annual income is about £100,000 it will be reduced instead. Above £123,700, no exemption is granted.

Again, if your crypto activity is determined by the HMRC to be Income rather than Capital Gains, it will be taxed according to the same table:

Bracket Taxable income Tax rate
Personal Allowance Below £11,850 0%
Basic rate Above £11,851 but below £46,350 20%
Higher rate Above £46,351 but below £150,000 40%
Additional rate Above £150,000 45%

 

Implications

As CG tax rates are significantly lower than IT rates, it would appear advantageous to be taxed under the former. This might necessitate a change to a longer term trading strategy (such as “buy and hold”) for very active traders who wish to avoid a higher tax rate.

Disclaimer

This article is intended for information purposes only, and should not be taken as legal or tax advice. The author is neither a tax professional nor a British citizen. We recommend that you conduct your own research into the matter; the Gov.UK site contains a great deal of helpful information on this subject and should be considered as authoritative. Kindly consult with a tax specialist, such as an accountant or tax lawyer, should any questions or difficulties arise.

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