Fintech Awards 2018

8 Barter and the taxation of bitcoin transactions By Neil Simpson, partner at haysmacintyre The taxation of transactions in bitcoin and other cryptocurrencies presents a number of significant challenges to HM Revenue and Customs (HMRC). However, the provision of a conceptual framework to answer the question: “how are gains derived from such transactions to be taxed?” would not appear to be one of them. An apparent nonchalance characterises HMRC’s position to date with guidance limited to a “Brief” issued in March 2014. This simply asserts that no specific change in tax law is required and that existing tax rules are sufficient to regulate the increasingly popular cryptocurrency, although it is noted that “given the evolutionary nature of these cryptocurrencies” further guidance may be provided as appropriate. In terms of the timing and targeting of such future guidance there are perhaps two aspects of the current interest in cryptocurrency that are likely to inform HMRC’s approach. Cryptocurrency has drawn comparisons with the dot com bubble of the early 1990s and there is certainly one significant similarity in that retail investors account for the majority of trading. It is individual rather than corporate and collective investment has taken the lead with institutional investors largely remaining on the sidelines. As with the dot com bubble, volatility in the cryptocurrency market, particularly in the price of bitcoin, has shifted emphasis away from the economic fundamentals of such investments and towards speculative investment. The spate of Initial Coin Offerings (ICOs) reflects this speculative fever with individual investors seeking to buy in at the ground floor on the next bitcoin or Ethereum. These are the factors that are likely to inform HMRC’s approach with an expected emphasis being placed on policing the reporting obligations of individual investors as the next reporting season for the tax year 2017/18 draws near, a tax year in which much of this speculative interest arose and was transacted. For most individuals their bitcoin (or other cryptocurrency) will have been acquired as an investment or short term speculation. In the nature of speculative bubbles some individuals will have realised 1 substantial gains, others substantial losses, and their preferred tax treatment will be dictated by that outcome. Those with substantial gains may seek to argue (based upon some, perhaps now regretted, comment by HMRC in their Brief) that transactions in bitcoin may be so highly speculative that neither a taxable gain or loss results as the transactions are analogous to gambling (gambling winnings are not taxable, although this is not as generous as it might first appear as HMRC’s greater concern, of course, is that gambling losses should not be allowable). This argument is thought unlikely to succeed, particularly for those realising gains from more recent bitcoin acquisitions, although HMRC may be more easily persuaded that transactions are gambling where losses have resulted! Those individuals who have realised losses may seek to argue that their transactions in bitcoin are in the nature of a trading activity for which a more generous use of loss reliefs is available. Save in very exceptional circumstances, this is another argument doomed to failure as the evidential hurdle for “trading” is very high and seems unlikely to be met in the overwhelming majority of cases. It seems clear that HMRC see gains realised by individuals from investment transactions (including short term speculation) in bitcoin as being subject to capital gains tax (CGT). For an individual, an annual exemption of £11,100 is available with the rate of CGT on gains in excess being 18% for basic rate taxpayer and 20% for those higher and additional rate tax payers. As with shares of the same class the holder of bitcoins will have a single pooled asset for CGT purposes which will increase or decrease with each acquisition, part disposal or disposal. Generally, any capital gain will be realised on conversion of the bitcoin or other cryptocurrency into sterling or fiat currency. With the asset (here the investment in bitcoin or other cryptocurrency) having been realised in cash, there is an obvious disposal event. However, an exchange into other digital currencies or the acquisition of goods and services utilising the bitcoin (or other cryptocurrency) represents a barter transaction and a disposal for capital gains tax