Bitcoin, the peer to peer currency, has recently hit the headlines with plummeting values after China ordered trading in the currency to cease. This plunge followed some startling increases in value over the previous year, from $595 in October 2016 to $4,950 at the start of September this year.
So what are the tax consequences of purchasing such a currency?
As gambling or betting wins are not taxable, in some circumstances, gains made from the increase in value of your cryptocurrency may not be taxable at all. If you invest in an ICO (Initial Coin Offering), you are buying coins during the start-up phase of a new cryptocurrency. This is normally viewed as highly speculative, and therefore an increase in the value could be seen as gambling and not taxable. However, a gambling loss would not be allowed to offset against any other gains for Capital Gains tax.
But if you exchange sterling for an existing cryptocurrency such as bitcoin, with a view to creating long term wealth, this is an investment, and taxed as Capital Gains once the investment is sold again.
There is no clear guidance from HMRC on how to assess whether it will be viewed as an investment or gambling. They have stated that they will look at each case individually and decide on the facts of that case.
Use my company to invest?
If you’re investing to create long term wealth, any increase in value will be subject to tax. Individuals pay Capital Gains tax (CGT) and companies pay Corporation Tax when an asset they own is sold at a profit. Equally, if an individual or company makes a loss when Bitcoin is sold, this can be offset against other gains to reduce the tax liability.
If you are a director/shareholder, you can choose whether to pay yourself salary & dividends to then invest personally, or leave the funds within the company so the company will hold the Bitcoin. Withdrawing salary/dividends may create an income tax liability.
Invest via your company
As at September 2017, Corporation tax is 19%, and due to reduce to 17% by 2020. Once you sell the Bitcoin, the full amount of the gain (sales price less cost) will be subject to Corporation tax.
However, if the normal day to day trading business of your company has made a loss, then this can be offset against the Capital Gain, to reduce the tax payable.
Invest as an individual
For individuals, Capital Gains tax is 10% for basic rate tax payers and 20% for higher rate. These rates have changed in recent years, and as with all tax rates and rules, may change again in the future.
One significant tax advantage to purchasing any asset as an individual is the Annual Exempt amount. This is similar to the Personal Tax allowance. It’s currently £11,300, and means that the first £11,300 of net gains in the year (sales price less costs) are exempt from CGT. You could sell your Bitcoin over a number of years in such way as to use your Annual Exempt amount, but not exceed it, and therefore have no tax to pay.