Over the last few months, we have had a number of questions on Bitcoins and other cryptocurrencies. We thought it would be useful to go through some of the questions raised and the issues they brought up.
The majority of the questions can be answered by looking through the HMRC brief 9 (2014). This is found on the Revenue website if Bitcoin is typed into search. It must be said it is interesting to see HMRC were on the ball early to bring out their briefing in 2014.
Some of the questions covered were:
My client bought a bit of a bitcoin some time ago and has now sold it. How do I treat this for tax?
The simple answer it will be taxed as a capital gain unless they are doing sufficient transactions etc. to mean that it is trading. You need to look at the usual badges of trade and a one-off transaction like this would be insufficient to qualify. This is the same if it is held by an individual or a company.
My client is clearly trading he has over 3000 transactions in the last six months. How can I recognise the costs?
Here is where the brief is lacking. It does not give clear guidance as to how to do this. However, if a consistent and reasonable way is used then it is unlikely to be challenged. Basically, we feel that it is best to think of these as you would shares. Therefore you would need to pool the costs and then use this as the amount against which you would calculate any profit. This is because it is very difficult to recognise which Bitcoin or part of a bitcoin is actually bought and sold. If you use the share pooling arrangements then you will not go wrong and will achieve a reasonable answer.
My client was paid in Bitcoins for work done. How does he recognise it?
Basically, this is revalued on the day of receipt back into sterling and used as the income. Usually, it is in payment of an invoice which could well be in sterling so there is a figure to use there.
The difficulties arise when it takes a while to get the currency changed to cash. This can mean that the final amount received can fluctuate wildly from the original amount. For businesses, they will need to consider the usual rules for exchange rate gains to see how these should be reported.
My client has switched between currencies. How is that taxed?
Effectively here you are switching between assets and therefore will be tax accordingly on each transaction. It is again the same as you would do with shares with each being a separate asset and therefore taxed when sold.
This is a simple rundown of the sort of questions that are raised by this trading. If there are more specific issues we can always assist with these on an ad-hoc basis.