CryptoCurrency Taxation: HMRC close loophole?

18th January 2019

HMRC are not known for being ahead of the curve, so trying to find official guidance on how exchange gains from selling bitcoin, and other crypto currencies, is expected to be self-assessed and taxed, was always going to be ‘problematic’. At the time of first researching this, the latest HMRC guidance was published in 3 March 2014. This suggested 3 possible tax treatments:

 

  1. Income tax – for individuals who buy and sell cryptocurrency as a business (with a high degree of frequency and organisation).
  2. Capital gains tax – for individuals for hold crypto currency as an investment.
  3. Non-taxable – for highly speculative transactions (akin to gambling).

 

HMRC then updated this guidance on 19 December 2018. Although the general tax principles remain the same, there is one noticeable change: HMRC now explicitly state that “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”, so option 3 above is ostensibly now removed.

 

For most instances, this will not be a problem, as the background circumstances will not support an argument that the underlying motives were akin to gambling. But take the example of a student, who comes across bitcoin in July 2013 as part of his computer sciences degree course, and so purchases £100 worth (then priced at US$68 per unit).  Four and a half years later, after all the hysteria of a typical bubble market, when the unit price peaked at US19,500, he remembers his purchase and decides to cash in (holding now worth around £30k). As this was clearly a one-off small value speculative purchase, why should this individual’s tax liability be different, dependent upon whether he completed his tax return before 19 December or after? What we have here is the holy grail of tax practitioner dislikes: retrospective legislation. Although, of course, this is not legislation, it is merely HMRC guidance, and HMRC have recently been brought to task over their other guidance incorrectly stating that all directors must submit self-assessment tax returns (even if not issued a notice to file by HMRC). So our astute ex-student now has a dilemma; what best to do?

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