Cryptocurrencies – new guidance issued by HMRC on tax treatment of Bitcoin etc

HMRC has issued welcome guidance on the tax treatment of cryptocurrencies.

The guidance covers digital crypto-assets including, but not limited to, “Exchange tokens” – the best known of which is perhaps Bitcoin but of which there are around 1,500 different types.

The guidance has confirmed that the buying and selling of these assets will be treated as investment activity rather than trading with the result that the transactions will be subject to Capital Gains Tax, rather than Income Tax.

Previously, there was dubiety over the treatment of such proceeds and whether they might be construed as either trading or gambling activity, the tax treatment of which differs considerably from both each other and that of investment activity.

With regard to income derived from this type of activity it is also confirmed that to the extent that action is required by the investor to undertake an action in order to receive income, the income will be taxed as miscellaneous in the hands of the investor unless they are in fact trading.

The use of virtual assets

HMRC have undertaken to issue further guidance shortly as although this initial guidance has assisted to some extent, there are still questions around the situs of virtual assets (where they are treated as being located for legal purposes) and further guidance is required for companies using virtual assets to make payments either for trading purposes or to compensate those working with or for them.

Although current guidance has acknowledged that in some cases cryptocurrencies can be received as payment for services or employment, careful consideration is required to establish whether the currency paid is a readily convertible asset, in which case PAYE and NIC deductions should apply, or if not, they should be treated as a benefit in kind.

As with any investment activity, the onus of record keeping and reporting is on the taxpayer. If you receive tokens you must keep records for the tokens that you receive including:

• type of tokens
• date you received them
• number of tokens you received
• number of tokens you have in total
• value in pound sterling
• bank statements
• the date you disposed of the tokens

You may also want to keep other records such as wallet addresses.

Any transactions in cryptocurrency made during the 2017/18 tax year may be reported on a self-assessment tax return which for that year must be submitted, and any tax paid by 31st January 2019.

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If you require advice on the issues discussed here, please get in touch with a member of our team.