With the price of Bitcoin going past the $11,000 mark and currently sitting at $10,245.50, many people have made considerable profits even if they invested in Bitcoin only last week. Some invested at the beginning of 2017 and are now seeing 10x returns. Regardless of when you invested, it seems that at this particular point in time, anyone who got involved in this cryptocurrency made some sort of profit.

Some of the people who made great profits decided to cash out, which is partly the reason why many exchange platforms have crashed yesterday. However, with profits comes tax – so what does this mean for people looking to cash their profits back out in fiat?

Last update from HMRC was 3 years ago

The last guidance issued on taxation of cryptocurrencies by HMRC dates back to March 2014 – when the price of one Bitcoin was $630. The guidance is vague as it states that cryptocurrency gains and losses fall under the capital gains tax system, but also that if a transaction is speculative enough to deemed “gambling”, it may not be subject to tax – and losses would not be claimable for tax purposes either. However, this is decided on a case-by-case basis.

Etienne Wong, a barrister specialising in tax, stated:

“I don’t think HMRC knew what it was doing when it wrote the gambling exemption. At the time, my opinion is that it was mainly concerned with preventing people claiming huge losses”

The guidance mentions “highly speculative transactions”, so what does that mean and where is the line drawn? Additionally, if the person in question is deemed to have made his profits as a “trader”, profits could be taxed according to the income tax.

According to his article in TaxJournal, Robert Langston of accountancy firm Saffery Champness identified 3 different ways in which tax could be applied to cryptocurrency profits:

1. Trading profits falling under income tax

This would be the case when frequent, short-term cryptocurrency transactions meet the criteria required to be classified as a “trader”. However, based on his experience in a legal case law, he said it is “very unlikely that cryptocurrency profits would be treated as trading profits”, although he did not rule it out. Again, this is ambiguous as one could argue that someone dedicating a significant time to conduct short-term cryptocurrency investments is in fact trading for tax purposes.

2. Gambling transactions which are not subject to tax

Cryptocurrency profits may have been seen as gambles a while ago, but nowadays the market is much more stable and we start to see the same trends as seen in the financial market. Therefore, Robert explains that it is difficult to now classify profits made on cryptocurrencies as gambling profits, as many of these investors have strategies that do not rely exclusively on chance.

However, even if these profits were deemed a bet, Robert explains that because these bets are not placed in cash, the profits made from cryptocurrencies would still be regarded as a chargeable asset for tax purposes.

3. Capital gains subject to capital gains tax

When it comes to considering these profits as capital gains, Robert argues that this is the most likely scenario:

“HMRC’s guidance pre-supposes that cryptocurrencies can be chargeable assets for capital gains tax purposes. This is probably correct; they are intangible assets which carry certain rights, and can be bought and sold. The profits you make on cryptocurrency are therefore likely to be subject to capital gains tax.”

Can the HMRC find out if I decide not to declare my profits? 

In a similar situation to what happened in the US recently, when Coinbase was ordered to report 14,355 users to the IRS, the HMRC could require any cryptocurrency company based in the UK to share information about their customer holdings.

Additionally, cashing out your major profits made from cryptocurrencies to your bank account is likely to raise questions – especially since it is clearly visible on the bank statement that these payments are coming from a cryptocurrency firm.

If that wasn’t enough, HMRC designed a new “snooper computer” which continuously collects information from a wide range of finance firms. If there is any reason for you to be under investigation, you will have to explain the large payments coming from your cryptocurrency profits and the origins of these profits.

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