Bitcoin was introduced in 2009 as the first digital, ‘virtual’ currency. Since then, a number of other cryptocurrencies have emerged such as Ethereum, Litecoin, Cardano and Stellar.
Seemingly unaffected by the pandemic, in the year from March 2020 the value of the Bitcoin experienced a meteoric rise. Following Tesla’s announcement that it had acquired $1.5billion of the digital currency, the first quarter of 2021 regularly saw the value of a single bitcoin exceed $60,000.
However, within the last couple of months the value of Bitcoin has plummeted following speculation about increased government regulation in certain countries, a decline in the Bitcoin hashrate (the number of Bitcoins being mined) and Tesla’s decision to suspend vehicle purchases using Bitcoin due to climate change concerns.
Bitcoin is not just the preserve of wealthy investors and market volatility has spooked many people into selling their cryptoassets. However, when it comes to the tax implications, these individuals are often left scratching their heads.
In the vast majority of cases, individuals hold cryptoassets as a personal investment hoping for capital appreciation. In such cases, they will be liable to pay Capital Gains Tax when they make a disposal. The rules for calculating the gains are similar to the rules for shares, with different cryptocurrencies held in separate ‘pools’ with special ‘matching’ rules that tell you how to allocate costs if you only sell some of your cryptocurrency.
However, if you regularly mine or buy and sell Bitcoin and similar products, you may be treated as trading in cryptoassets and therefore subject to (much higher) income tax on any profits.
If you receive tokens from mining (and are not trading), this will be treated as ‘other taxable income’ (subject to income tax) and unless the amounts are very small, you will need to register for Self Assessment to report the income to HMRC.
Some employees are paid in cryptoassets. Where the currency can be publicly traded (such as with Bitcoin), it will be treated as a ‘readily convertible asset’. This means that the employer must deduct and account to HMRC for PAYE and National Insurance contributions in the same way as for any other salary payment. Otherwise, the individual employee must declare the ‘earnings’ and pay income tax via Self-assessment (but the employer will still need to pay Class 1A NICs to HMRC).
Another form of payment is an airdrop, where someone receives a free allocation of tokens, for example as part of a marketing or advertising campaign. Income tax may apply to airdropped tokens if they are received as part of a cryptoasset business (in which case they are taxed as trading income) or if they are allocated in return for, or in expectation of, a services from the recipient (in which case they are reported as ‘other taxable income’).
However, even if there is no charge to Income Tax on receipt, the subsequent disposal of a token received through an airdrop may still give rise to a chargeable gain for Capital Gains Tax purposes.
Stamp Duty considerations should also be borne in mind when it comes to using cryptocurrency to pay for shares or to purchase land or property. As the tokens amount to “money’s worth”, the transactions can fall within the SDRT and SDLT charging provisions.
HMRC recognises that cryptocurrencies and the technologies behind them will continue to evolve and that consequently, so will the tax rules. It is essential therefore that tax professionals adopt an agile approach to advice in this area, and that individuals talk to their tax adviser to check if they need to pay tax on any transactions made in this currency.