Is Bitcoin going mainstream and will I get taxed?

BitcoinThose of you that know me will probably have heard me go on about Bitcoin over the last five years. It’s a technology that I’ve been interested in for a while and even looked at making Langdowns DFK one of the first accountancy practices to accept Bitcoin. However, volatility and the general stigma attached to Bitcoin put us off going down this route; how I rue that decision now!

Over the last year Bitcoin has experience over a 1000% growth (yes, that’s correct). If you invested $100 five years ago you’d be sat on $75,000 now! Many would say there is no basis for such growth, particularly as a Bitcoin has no tangible asset that backs it in the same way something like gold has or the way a fiat currency (Sterling) is backed by the Bank of England. Does this mean it’s just a big Ponzi scheme or is it the future of decentralised currency that removes the Governments ability to meddle in finance?

A brief background of Bitcoin… Bitcoin was the first of what are now hundreds of crypto currencies. Launched in 2008 by Satosho Nakamoto (an alias as no one actually knows who created the system) as part of a rebellion to the Credit Crisis and intervention of Government in the markets. Bitcoin uses a technology known as the Blockchain to produce a distributed ledger, which means everybody can see what happens in the blockchain with the value (a Bitcoin or part therefore) transferred between two parties through the use of secure public  and private keys. (Very brief history, but if you want to know more talk to me!)

The sudden and exponential growth of Bitcoin has brought the ‘currency’ to the front pages with more people wanting to know and understand the impact on their finances. And with finance hopefully comes profits/gain and with profits comes tax!

The taxing of Bitcoin

HMRC have provided some guidance on crypto currencies back in 2014, but this is now woefully out of date given the growth in its availability and activity. Fundamentally there are three potential ways Bitcoin gains could be taxed:

  1. Income tax
  2. Gambling, therefore no tax (potentially!)
  3. Capital gains tax (CGT)

Income tax would generally be considered the most expensive tax. So if you are trading in Bitcoin, looking to make short term gains, in and out of the market, then you could be considered a trader, which could make such gains subject to income tax. Equally, if you are actually accepting payment for good/services or paying for good/services in Bitcoin then it is being used in the business as a currency, so the movement maybe treated as any normal foreign exchange movement.

Alternatively, should the gains you make on Bitcoin be considered gambling? Well this is a tricky one, and potentially comes down to how you have taken your position. If you have actually purchased a Bitcoin it is generally considered a commodity, therefore a chargeable asset and any gain subject to CGT. It is still possible to bet on Bitcoin but you are unlikely to own the underlying asset.

This all neatly matches with HMRC’s guidance that pre-supposes that a Bitcoin is a chargeable asset for CGT and therefore gains arising on sale would be liable to capital gains tax.

Fundamentally, you are likely to be taxed on the gains you make, so make sure you keep a record of them and declare them on your tax return to avoid fines and penalties.

My final comment; Bitcoin is creating the headlines at the moment, but in my opinion and many in the technology industry, the long term is in the Blockchain and how this technology will revolutionise how we work in finance, banking, law, land, insurance, the world generally! We are at the dawn of a new technological era, change is happening quicker than ever before. Getting ahead of the curve is nearly impossible because of the exponential evolution; the key is keeping up to date and if possible moving before your competitors.

Author: Ross Garfitt, Director, Langdowns DFK Chartered Accountants and Business Advisers