- 11 Apr 2018
- Comments Off on The issues surrounding the taxation of cryptocurrencies
Cryptocurrencies such as Bitcoin are still a relatively new addition to the world of finances and, as such, the rules surrounding them aren’t completely clear as of now. It was a quick development that was difficult to predict and prepare for, and thus the issue of taxing Bitcoins and other cryptocurrencies is still mostly up in the air. Here are a few tips on how taxation works for cryptocurrencies.
The HMRC’s stance
The view HMRC holds regarding Bitcoins is constantly evolving, with a promise to issue further, more substantial guidance in the future as the topic itself undergoes further changes. As cryptocurrencies have an incredibly unique identity that cannot be accurately compared to any other financial activity or payment, HMRC advises that the issue of taxation should be handled on an individual basis for every transaction.
When it comes to the form financial activities surrounding cryptocurrencies take, there are two basic ones: mining, as well as buying and selling.
According to the HMRC, the trade of cryptocurrencies can currently be classified under one of three categories.
- The first scenario treats it the same way as gambling wins (short-term speculating). In cases like this, the amount isn’t taxable, but you are also not entitled to any reliefs in the event of a loss.
- Trading with the purpose of making a gain automatically makes the amount liable to income tax. This also means that all losses resulting from this are tax-deductable.
- It’s important to note that HMRC will treat most buying and selling using cryptocurrencies as lying within the scope of Capital Gains Tax, and as such, those expenses will follow the appropriate rules.
It is important to point out that, for all intents and purposes, cryptocurrencies are considered a foreign currency, so if you’re ever in doubt regarding how to handle your cryptocurrency-related taxes, consulting the relevant foreign currency regulations is a safe place to start researching.
Mining Bitcoins and other currencies follows a different set of rules, on the other hand. In such a case, HMRC views the activity a trade in all instances. The profits and losses will thus be taxed and relieved exactly the same way as income. It is important to note, however, that cryptocurrency mining lies outside the cost of VAT, making it exempt from that particular form of taxation, so even if the currency in question is exchanged for other currencies, you will pay no VAT for the transaction.