Cryptocurrency has been one of the most widely discussed topics in the business sector for the last decade. What originally seemed like an outlandish investment scheme has now become a mainstream currency, with more and more people investing in the likes of ‘Bitcoin’ and ‘Ethereum’ every day. Since major ecommerce facilitators such as PayPal and Amazon are now allowing consumers to make purchases with the currencies, now seems a prudent time to explore how the transactions involving cryptocurrencies will be taxed, and what sellers need to consider. As the industry is still relatively young, there is still some uncertainty about how HMRC will treat transactions involving cryptocurrency, but here is everything we know so far…
What Is Cryptocurrency?
Fundamentally, a cryptocurrency is just a virtual currency. What makes it special is the fact that it utilises encryption technology to ensure secure transactions. Whilst it has primarily been seen as an investment for trading, it can be used to make purchases for goods and services.
It is worth noting that there is still no worldwide consensus on how the currencies should be defined from a legal perspective. This has meant that a lot of the legal literature surrounding the currencies is largely inconclusive and is still in need of further clarification.
The Tax Implications For Individuals Using The Currency
The tax implications for individuals using cryptocurrency really depends on how they are using it. To determine how an individual is using the currency, HMRC have devised a system which uses ‘badges’. These badges will be used to determine how transactions need to be taxed.
Capital Gains Tax
If you are an individual who invests in cryptocurrency (or, at least when HMRC considers your transactions to be an investment) the currency will be treated as a foreign currency. HMRC are very clear on their treatment of foreign currencies – they deem them ‘chargeable assets’ for capital gains tax.
Thus, any gain made from buying and selling a cryptocurrency will be liable for capital gains tax. The tax should be paid in pound sterling at the converted value. HMRC do recognise that the exchange rate regularly fluctuates, and therefore they currently just require you to show that you have a made a ‘reasonable effort’ to pay the correct amount.
It is worth making clear that as there is still a fair amount of grey area surrounding the topic of taxing cryptocurrencies, HMRC will take each case on an individual basis. This means some mitigating factors, such as if you hold the currency in a foreign account, may alter your tax obligations.
Income Tax
The aforementioned ‘badge system’ really comes into play when HMRC are trying to ascertain whether you need to pay income tax. The badges are given to a transaction or a series of transactions in order to decipher whether the said transactions constitute trading activity.
Essentially, if HMRC believe you are buying and selling cryptocurrencies at a significant rate, either with or alongside other people’s money, they are likely to class this as trading. If this is the case, you would be required to pay income tax on these sales. The rate at which you would pay income tax would depend on your normal marginal rate. National Insurance would also be due.
The Tax Implications For Businesses Using The Currency
Assuming your business is not going to be trading or speculatively investing in cryptocurrencies, the main thing you will have to be wary of is accounting for VAT on the sale of goods and services. As the cryptocurrency is recognised as an official currency, any sales or services that are paid for using cryptocurrency should be treated in the same way as any other transaction.
This means that VAT will be due on any sales you make. You should pay this to HMRC in pound sterling. As before, the exchange rate does not need to be perfect, but you must show that you have a made a reasonable attempt to make the conversion. The value due relates to the value of the currency at the point of sale.
How We Can Help With VAT & Cryptocurrencies
As experts in providing tax services for ecommerce sellers, we can assist you in all your accounting needs.
At J&P, helping your business is our passion, and we understand that companies across the UK are at risk now more than ever, which is why innovation is crucial. We are here to support you through this period, so please do not hesitate to give us a call on 0161 637 1080 or send an e-mail to enquiries@jpaccountant.com.
