Bitcoins and taxes
Tulip, meet cryptocurrency. Bitcoin is now, perhaps, the biggest bubble in history – eclipsing Tulipmania, the dot com bubble, the housing bubble, the South Sea bubble, and the hard-to-explain enduring popularity of Bargain Hunt, staple daytime fodder on BBC One.
A few of us will have invested in Bitcoins many years ago not quite knowing what was about to follow.
And we’ve had the odd call or two in from clients asking about what the tax situation surrounding Bitcoin is.
Cryptocurrencies are a brand new thing – they’re ten years old in 2018. Tax law on them is still pretty much untested but here’s a summary of HMRC’s position.
But first, what is a bitcoin?
This is really difficult to explain. It’s more a question for theoretical mathematicians than accountants.
Bitcoin is a currency but it has no notes or coins. It’s not issued by banks. It’s not regulated by central governments. When we pay our tax, we don’t pay it in bitcoins.
Transactions are recorded on a ledger. Bitcoins are mined using a hashing sequence that requires you to prove you’ve gone through billions of mathematical puzzles to find a new one. There will never be more than 2.1 quadrillion bitcoin parts in existence.
At time of writing, the price is hovering around $20,000 dollar per bitcoin. In January 2015, you could buy bitcoins for $173.
Some say it is the currency of the future. Some say it’s a bubble. No-one really knows because bitcoins have not been long in existence and there is no track record to be able to say if the rise in price is supported by fundamentals or by leveraged investor cash.
I bought Bitcoin a few years ago and my Bitcoins are now worth £10m
If that is you and you bought your Bitcoin a few years ago for £10,000, what tax would you face?
If you bought the coins as an investment and you’re not a Bitcoin dealer or miner, you would be subject to Capital Gains Tax.
There is an annual allowance for Capital Gains Tax of £11,300.
If this was you, you’d subtract your £10,000 investment from your £10,000,000 sale price, leaving you with £9,990,000. The first £11,300 of your gain would be exempt so the profit on which you pay your Capital Gains Tax would be £9,978,700.
Assuming you had no other income during the year, you would pay 10% on the first £33,500 of your gain and 20% on the remaining £9,945,200 – your final bill would be £1,992,390.
I am a Bitcoin trader or miner and my Bitcoins are now worth £10m
If you are a miner or a trader, you will pay Income Tax and National Insurance on your gains, not Capital Gains Tax, because it’s your trade.
According to Marketwatch, the average cost to mine a Bitcoin in Louisiana at the time of writing (December 18th 2017) is $3,224, or £2,409 at the exchange rate at time of writing.
It wouldn’t happen this way but let’s say you mined your £10m worth of Bitcoin on one day – that 668 Bitcoins. The cost of the electricity needed to mine this number of Bitcoins would be 668 multiplied by £2,409 equalling £1,611,586.
Your profit would be £10,000,000 minus £1,611,586, or £8,388,413.
You would pay £3,930,769.82 in tax (comprising £3,760,586.30 in income tax, £170,183.52 in National Insurance Class 4, and £148.20 in National Insurance Class 2).
My company is a Bitcoin trader or miner and its Bitcoins are now worth £10m
If you are the director of a Bitcoin mining or trading company, you will pay Corporation Tax on your gains.
Taking the example above where there is a profit of £8,388,413, your company would pay 19% of that in tax leaving it with a bill of £1,593,798.28.
Should I worry about VAT?
If you buy, sell, transfer or convert Bitcoin to a standard currency, no VAT will be payable.
If you’re a Bitcoin miner and you’re VAT registered, you’d be able to claim back the VAT you’ve been charged on your electricity bills.
If this is your situation, remember that we’ve been brilliant accountants to you and we love you very much! To hear the depth of our love, please speak to your accountant at Panthera on 01235 768 561 or email the team at firstname.lastname@example.org.