On December 19, 2018, the UK officials confirmed that Bitcoin payments received by UK tax residents will be subject to UK taxation. The HMRC is now clear: digital currency is not a currency or money.
The exact purpose of a Bitcoin transaction seems to determine the exact tax treatment of it. For example, if you just own cryptocurrency like Bitcoin that you later sell, then the Bitcoin is treated as an investment asset; any subject such Bitcoin payments will be subject to the UK capital gain taxes. Similarly, if you mine Bitcoins on an occasional basis, then it is also taxed as a capital gain.
However, if the mining of Bitcoins rises to the level of doing business, then it would be treated as income gains as part of a financial trade and subject to ordinary income taxation.
Moreover, if a UK employee receives Bitcoin payments from his employer, these payments will be subject to UK payroll taxes. The amount to be taxed will be based on the “best reasonable estimate” of the value received. It also appears that the employer may need to recognize a capital gain in certain situations.
The most interesting guidance appears to be with respect to Bitcoins received and given away for free as well as stolen Bitcoins. If a Bitcoin received for free (rather than received a payment for a service), then it may actually be tax free. It is not clear what the cost-basis would be in such a Bitcoin.
Stolen Bitcoins do not appear to produce any tax consequences, because, paradoxically, HMRC appears to consider such Bitcoins as still owned by the same taxpayers. If a taxpayer forgets his password needed to access his Bitcoins, however, he may be able to claim a loss if he persuades HMRC that he will never remember the password. It is not clear at all how the taxpayer would be able to do so.
The recent HMRC guidance concerning Bitcoin payments is highly important and seems to be mostly aligned with that of the IRS in the United States. Sherayzen Law Office advises its clients on the US tax consequences of Bitcoin transactions. Contact Us Today to Schedule a Confidential Consultation!