Investors of Bitcoin who made large gains when the value of the cryptocurrency rocketed in 2017 have been informed that they could unknowingly owe tax to the HM Revenue and Customs (HMRC).
However, there is some confusion regarding the issue. The boss and co-founder of cloud accounting software provider FreeAgent, Ed Molyneux, clarifies: “HMRC sees bitcoin profits being subject to capital gains tax, but there does not appear to be a definitive answer on the issue yet, which could cause confusion among investors.”
It all comes down to whether bitcoin is classified as a currency or an investment. Currencies are exempt from tax on capital gains. However, investments and commodities, on the other hand, are not.
The HMRC said that the treatment of income that is received from cryptocurrencies would be subject to a tax that is based on the “activities and parties involved.”
“Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts,” said the HMRC.
Where bitcoin is held as an investment, any profit that is made by its disposal will be charged with capital gains tax, or if the person that is holding it is a company, corporation tax will be imposed, it said.
The agency added that if someone trades in bitcoin very frequently, they may be liable for income tax instead. However, HMRC also stated: “We think this would be unusual – in most cases, an individual disposing of a cryptocurrency will have held it as an investment will be taxed on gains and profits under the CGT rules.”
The price of Bitcoin shot up from around $1,000 to almost $20,000 late last year. However, it has since dropped back down to around $11,000 during today’s trading.
The cryptocurrency is not the only developing issue that is shaking up self-assessment tax returns. Molyneux said that earnings from the gig economy, such as Airbnb rents, can trip some people up as well.
Molyneux suggested that the individuals who have made money on bitcoin directly contact the HMRC in order to check whether they will need to include the information in their self-assessment tax return.