Bitcoin and taxation – what do investors need to know?

  • Inheritance tax on Bitcoin a huge risk area.
As more private investors are tempted into cryptocurrencies, there are a number of key points on tax people need to be aware of to avoid errors, HMRC penalties, and paying more tax than necessary.

Inheritance tax: beware the one-year limit
If you inherit Bitcoins, the estate may be liable to pay inheritance tax on them at 40%, so long as the overall estate is worth more than £325,000. The taxable value of the Bitcoins you inherit is set on the date of death of the person you inherited from. But what happens if their value falls sharply after you pay the tax?

If you inherit Bitcoins worth £100,000, the estate will be liable to pay £40,000 of inheritance tax on them. If the value falls to £50,000, you can sell them at that price, and, but only if they happen to be ‘qualifying investments’ (which would be unusual – each currency needs looking at) claim back the excess inheritance tax paid.  In this case, you would get £20,000 back.

But you only have one year after the date of death to sell them. If you hold the Bitcoins for more than a year, you can no longer reclaim the excess tax if the price falls, even if they are ‘qualifying investments’.

Capital gains tax: should you have reported your gains to HMRC?
If you sell your Bitcoins at a profit, and exchange them for any ‘real’ currency, you may liable to capital gains tax (CGT). The rate will be 10% or 20%, depending on whether you are a basic or higher rate taxpayer.

There are still many people who treat Bitcoin income as though it is tax free, and are unaware that they may have made capital gains that they should have reported to HMRC. However, HMRC is likely to treat that as tax evasion if they discover it. Taking professional advice is therefore critical in this situation.

Income tax: are you a ‘trader’?
If you are a private investor in Bitcoin, your profits should not be classed as income, and you will not be liable to income tax.

However, HMRC is actively seeking out private investors who make frequent trades in Bitcoin and other cryptocurrencies. If it decides you are too active, it will try to classify you as a ‘trader’, meaning you will be liable to pay income tax on your profits instead of CGT. UK-based cryptocurrency or CFD platforms must provide data to HMRC on all their customers.

So be careful, and take professional advice, especially if you take Bitcoin positions for only a short time.

Selling your Bitcoin: you may need professional advice
When it comes to selling a large value of Bitcoin, especially if you have built it up over a long period of time, you are likely to need professional advice. Working out your taxable gains when you have held different parts of your Bitcoin portfolio for different periods of time can be extremely difficult. If you get it wrong, HMRC is unlikely to be lenient. Avoid the risk of errors and penalties by getting an accountant to calculate your gains properly.

Hazel Johnson, Associate Director, comments: “A lot of private investors are going to need tax advice on their cryptocurrency investments – there are so many potential pitfalls, and huge costs if they get it wrong.

“Many of those who have invested in cryptocurrencies recently are not aware of the complex tax issues they may be getting into.

“HMRC is actively investigating, and aiming to catch people who have not paid the correct amount of tax on their cryptocurrency gains.”

This article provides a brief guide to the key issues, but specific advice should always be sought. For further information, please get in touch.  

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