How cryptocurrency trading is taxed
The price of bitcoin is currently on a bull run similar to when we wrote about crypto in 2017. Despite HMRC's guidance misconceptions about how cryptocurrency trading is taxed still exist.
Is a crypto trader speculating?
The tax rules state that gambling transactions are exempt from capital gains tax. Therefore a professional gambler is considered outside the scope of UK tax
Initially HMRC suggested speculating in cryptocurrency might be akin to gambling 'depending on the facts'. This was published before the rapid ascent of cryptocurrency.
As a result, having been caught out by the 2017 crypto boom, HMRC have completely backtracked from this position.
However, investing in cryptocurrency involves purchasing an intangible asset with a volatile value. Moreover it does not fall within the definition of a 'bet' as determined in case law.
Some speculate that cryptocurrency transactions could be like 'spread betting' and thus exempt from capital gains tax. However without a specified 'end date' determining the 'winners' or 'losers' it is difficult to parallel crypto trading transactions and spread betting.
Although, if an individual invests indirectly in cryptocurrency and by reference to a spread betting index, an argument for spread betting treatment could apply.
However in HMRC's updated guidance they state the gambling tax treatment does not not apply to buying and selling cryptocurrencies by an individual. Although in this fast evolving crypto space some transactions involving cryptocurrencies, might be regarded as gambling - perhaps in the gaming sector?
Will cryptocurrency trading be taxed as trading profits?
If trading in cryptocurrencies results in profits being taxed as income would be disadvantageous. Income tax rates are generally higher than capital gains tax rates.
How cryptocurrency trading is taxed will depend on whether HMRC views the activity as a trade. The determination relies on pre-existing tax case law.
HMRC's use the 'Badges of Trade' to decide if an individual is trading. These 'badges' are indicators evolved from tax case law suggesting business profits subject to income tax.
The more 'badges' HMRC 'pin' on a transaction the more likely they will argue that trading is occurring. However, these badges are merely indicative and ultimately all the facts will determine the tax treatment.
There is no specific case law relating to whether cryptocurrency activities amount to a trade. However as we've previously suggested, parallels can be drawn between cryptocurrency trading and share trading.
For instance, individuals suffering losses from share dealing might claim they are trading, to obtain the benefits of sideways loss relief against their other income.
As a result, HMRC typically reject these claims in all but the most clear-cut situations. Moreover this is evident from a number of tax cases where individuals failed to prove their share dealing activities amounted to a trade. HMRC argued they were investment transactions subject to capital gains tax rules.
Occasionally HMRC lose this argument. For example Mr Ali successfully argued his share dealing activities amounted to a trade. His share dealing activities followed a business plan which gave them an organised' trading like quality.
Conclusion
HMRC is aware of cryptocurrency volatility and the benefits the income tax treatment of losses. Therefore they often apply a tax treatment similar to share trading when determining how cryptocurrency trading is taxed.
For this reason they consider a similar tax treatment to that of share trading should be applied when determining how cryptocurrency trading is taxed. Moreover this is their default position.
Understanding how cryptocurrency trading is taxed can help navigate these complex regulations. By following HMRC guideline, individuals can ensure compliance and optimise their tax position. Knowing how cryptocurrency trading is taxed is crucial for any investor in this evolving sector.
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