The publicity in the rise and fall in the value of bitcoin has led to us seeing interest in the commercial opportunities surrounding cryptocurrencies – what are the tax implications?
The most common scenario that we are seeing is individuals buying and selling cryptocurrencies.
The most likely tax position of such activities is that any gains or losses are likely to be taxed as capital – with gains being able to benefit from an individual’s annual exemption and the balance taxed at 20%, and losses available to set against gains.
It is worth noting that each cryptocurrency is an asset for capital gains tax purposes, and therefore transfers between cryptocurrencies will create a gain or loss at the time of the transaction.
It is possible that if gains are substantial HMRC may argue that the gains are, in fact, trading income that is liable to the higher rates of income tax and National Insurance (NI). Any such assertion should be resisted in the first instance and the facts of the matter scrutinised.
Similarly, if losses are substantial HMRC may seek to restrict the losses on the basis that they arose from gambling, rather than investment, activities, say. Again, the facts of the case should be reviewed, and losses treated appropriately.
Mining and Validation
Mining and validation activities will need capital investment in hardware, and an ongoing financial commitment to fund running costs. Such activities are more likely to be considering trading activities for tax purposes with an individual’s profits liable to income tax/NI and losses may be available to set against income.
However, HMRC may argue that any losses arose due to the trade not being carried on with a reasonable expectation of profit and disallow the losses. If mining or validation activities are being undertaken it will be important to ensure that a business plan is in place so it can be shown that the activities are commercially viable.
Initial Coin Offerings
We are also seeing interest in companies launching their own cryptocurrencies. These currencies are intended to be launched as a mechanism to raise capital, or to create a micro-economy with the currency being the sole means with which to buy a product or service.
These businesses offer tax challenges to the entrepreneur and the tax system. While trading, mining and validation activities can be largely dealt with within the current tax system, ICOs are proving incompatible and perhaps tax inefficient – the funds raised through an ICO may be considered taxable.
Until ICOs are addressed directly by the tax system they must be approached with caution, and the tax position planned for with innovation and an open mind.