What is Bitcoin? and how do HMRC view this cryptocurrency with regards to Tax?
We’ve all heard a little about bitcoin and crypto currencies in the last couple of years and it’s becoming increasingly important in the global economy. There are stories of people making millions from buying and selling bitcoin, but what is bitcoin, how does it work and should we all be investing in it?
What is bitcoin?
Bitcoin is a digital or crypto currency. It is created and held electronically and controlled by no one person or institution. There are many different types of cryptocurrency in circulation however, bitcoin seems to be getting the most publicity, mainly due to the astronomical increases and decreases in value, making individuals and companies millions overnight.
The idea behind crypto currencies was to create a currency that was instantly electronically transferrable with very low transaction fees. The main advantage to the users of bitcoin is that it is a decentralised currency - no one institution controls it and no one’s money is under control of any bank. Bitcoins are produced by computers across the globe, running software that solves mathematical problems in a process called mining. Once a problem is solved, a bitcoin is produced. You can use that bitcoin to buy things electronically, and increasingly shops and stores around the world are starting to accept it. According to the Telegraph, ‘Google queries for "buy bitcoin" now surpass "buy gold" as the currency's price has rose from under $1,000 (£742) at the start of 2017 to almost $20,000 in December.’
The main problem with bitcoin is its volatility. No one can predict the value of the currency and huge fortunes have been made and lost as the value swings first one way and then the next. The currency took a sharp hit just before Christmas, dropping almost 30 per cent from the heady $20,000 a few days before. That’s OK if you are able to take a longer view or if you can afford to lose your investment, but increasingly, it appears that people are losing large sums speculating and there is concern that bitcoin is a bubble which is about to burst – potentially catastrophically.
How do you buy bitcoin?
The first step is to set up a bitcoin wallet online to hold your bitcoins once you’ve bought them. There are lots of companies offering bitcoin wallets, but the Telegraph lists Blockchain - https://blockchain.info/wallet and Coinbase - https://www.coinbase.com/ as being among the biggest and most popular. The next step is to find a broker in much the same way as you would for buying and selling shares. You then put funds into their account using your credit card, or by way of a bank transfer and they send bitcoins to your wallet. Like any currency exchange transaction, exchange rates and fees vary considerably – there is a website Bittybot which allows you to compare brokers and shows their trust ratings.
How does HMRC view trading in bitcoins?
If you are mining or creating bitcoins (which would require a supercomputer and a lot of processing), HMRC would probably view you as trading in currency and any profits you make would be taxed as if you were self employed. The same could possibly apply if you are buying and selling bitcoins on a regular basis.
If you buy some bitcoins and make a profit selling them in a year or two, you may find that you have a capital gain. This is not necessarily a problem as you should be able to use your annual exemption to offset against any gain. At the moment, the annual exemption limit is £11,300. Any gain over and above that will be taxed, probably at 20%. The gain is calculated as the proceeds or amount received less the amount you paid to buy them in the first place.
Obviously this is a pretty simplified overview. Each case is different and depends on all sorts of things including any other income and other gains you might have.
If you have any questions around the tax implications of buying or investing in Bitcoin please get in touch with Robin Stevenson our Tax Partner
Robin Stevenson - Tax Partner
Tel: 01825 763 366
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