Bitcoin tax – we’re sure you’ve been watching the soaring price in the last few weeks with a fair degree of bewilderment just like we have. Just what is going on?

One thing is for certain – there will be a few hundred or a few thousand lucky Britons out there right now who, if they crystallise their gains and sell up, will become overnight multi-millionaires.

If you’ve just done a search on “bitcoin and taxes”, Burton Beavan have put together this article for you on the current HMRC position.

Please bear in mind that, because cryptocurrencies are so new, there is no tax case law on the subject – we can only go on what HMRC have published to date.

What is bitcoin?

If you’re reading this because you’re an investor, you already know (or at least have a better idea than the average person) what a Bitcoin is.

For the rest of us, Bitcoin is a virtual currency that exists online. It has a value and it can be converted into standard currencies like the US dollar, pound sterling, Euros, and so on.

Bitcoins are not authorised by any government nor controlled by any central bank. Bitcoins are produced or “mined” using an energy-intensive, highly-complicated mathematics hashing process. When the last Bitcoin is produced, there will be 2.1 quadrillion parts of Bitcoin.

Bitcoin as a method of payment is growing slowly. If you want to use it to pay for something, in most cases, you will have to look hard to find a retailer or supplier who will accept it.

There are two types of Bitcoin owner

Bitcoin does not make this distinction but HMRC does. The type of owner you are will determine how you’re taxed on it when you come to convert Bitcoin into pound sterling (or whichever currency you choose).

There are Bitcoin investors – people who buy Bitcoin with the intention of sitting on them and selling them at a profit.

And there are Bitcoin miners – people who set up an infrastructure which is designed to “mint” new Bitcoins. A miner owns any Bitcoins they’ve produced.

Bitcoin, tax, and the Bitcoin investor

Let’s say that you bought £500 worth of Bitcoin seven years ago and now your Bitcoin holding, when converted into pound sterling, is worth £1,000,000, meaning you’re £999,500 up on the deal.

You will be charged Capital Gains Tax when you crystallise your gain.

You’re charged Capital Gains Tax if you make more than £11,300 a year from the sale of most assets.

If you’d made no other income in the financial year in which you sold your £1,000,000 worth of Bitcoin, this is how you would be taxed.

You would subtract the £500 cost of buying the Bitcoins and the £11,300 allowance from your profit of £1,000,000, meaning that the amount you’d be taxed on is £988,200.

Your first £33,500 would be charged at 18% and the remaining £954,700 would be charged at 28% leaving you with a final capital gains tax bill of £273,346.

Bitcoin tax and the Bitcoin miner

This article was written on 19^th December 2017 when the Bitcoin price was £13,873.69. £1,000,000 worth of Bitcoins would be 72.0824 Bitcoins at today’s prices.

The process of mining for Bitcoins is incredibly complicated and energy intensive, according to mathematician Gregory Trubetskoy. Without going too much into Gregory’s text (because a lot of it is impenetrable to the non-mathematician or non-Bitcoin miner), a block of Bitcoins (containing twelve and a half Bitcoins) costs, at today’s exchange rate, £14,657.36 to produce if you are paying 8.9p in electricity per kilowatt.

If you mined all the Bitcoins on one day paying this amount for electricity, your costs would be £84,523.01 (plus 5% VAT).

Assuming you were VAT registered and could claim the VAT back on your electricity bill, your profit would be £915,476.99. Because bitcoin mining is your trade, you’d pay income tax and National Insurance on this amount.

Your bill would come to £496,839.36 (consisting of £397,764.65 in income tax, £20,274.78 in Class 4 NIs, and £148.20 in Class 2 NIs).

Bitcoin tax and limited companies

Limited companies would be subject to corporation tax on their gains.

If your company had purchased £1,000,000 worth of Bitcoins for £500, it would pay 19% of the profit on £999,500, equalling £189,905.

If your company spent £84,523.01 on electricity to mine £1,000,000 worth of Bitcoins, it would be taxed 19% on its profit of £915,476.88 or £173,940.

Bitcoin tax and VAT

There is no VAT to pay if you buy, sell, transfer or convert your Bitcoin into standard currencies. For a Bitcoin miner, they can claim back the VAT on their energy usage connected with the mining operation.

Bitcoin tax and Burton Beavan

If you have shown a Bitcoin profit and want to talk about the most tax-efficient way to crystallise your gains, please contact Burton Beavan on 01606 333 900 or email us at hello@burtonbeavan.co.uk.