The UK Taxation Of Virtual Cryptocurrencies
Cryptocurrencies have been in the news a lot recently – the most well known of these being Bitcoin. Whilst still seen as ‘geeky’ and hard to understand, it’s quite clear that cryptocurrency is starting to hit the mainstream with governments, banks and the general public starting to sit up and take notice.
What Is A Cryptocurrency?
Cryptocurrencies emerged in 2008. They can be defined as a ‘digital virtual currency that uses encryption technology i.e. cryptography in its creation and to ensure the security of transactions involving its use’.They are not secured by people or by trust, but by maths. When the security of cryptocurrencies have been questioned, it is often claimed that it’s more likely an asteroid falls on your house than that a bitcoin address is compromised!
Bitcoin is the most widely known virtual currency accounting for over 80% of the market capitalisation of known cryptocurrencies. Bitcoin was ‘announced’ in late 2008 by Satoshi Nakamotoas and was in fact a side product of another invention. It was conceived as a purely peer-to-peer version of electronic cash. It is a privately developed, internet-based currency that requires no intermediaries (goodbye banks!) for the processing of payments. Its supply is not controlled by any central bank, but it is fixed.
At Sleek, we are meeting more and more startups in the cryptocurrency and blockchain field. With a new virtual currency, governments have had to be quick to act to to clarify the existing law in relation to cryptocurrencies.
HM Revenue and Customs were quick to act in 2014 publishing ‘Brief 9: Bitcoin and other cryptocurrencies’ – this should be everyone’s starting point when considering any tax treatment.
Unincorporated businesses that make profits or losses on virtual cryptocurrencies must include these in their accounts. Transactions will be taxed in accordance with normal income tax rules.
The tax treatment of cryptocurrencies follow the general rules on foreign exchange and loan relationships .The profits or losses on exchange movements between currencies are taxable. HMRC have specifically stated that for the time being they do not see the need to introduce any bespoke rules, therefore no special tax rules for crypto transactions are required. For companies, exchange movements will be determined between the company’s functional currency (usually the currency in which the accounts are prepared – i.e Sterling) and the other virtual currency in question. The profits and losses of a company entering into transactions involving a cryptocurrency would be reflected in the accounts and taxable under normal corporation tax rules. Foreign exchange gains and losses are dealt with frequently by our cloud accounts department.
Payroll – PAYE & National Insurance For Employers
Whilst not covered in Brief 9 mentioned above, HMRC’s guidance on ‘Non-cash pay: shares you provide to your employees’ should be consulted. This states that if you offer non-cash payments to employees that are ‘readily convertible assets’, then you’ll have to to calculate and deduct PAYE and National insurance on that payment. Readily convertible assets could be stocks and shares, commodities or financial instruments and it is our opinion that cryptocurrencies are covered by this.
The readily convertible asset need to be valued for payroll purposes and the value would be the sterling exchange rate on the day of the payment of the cryptocurrency.
Once the cryptocurrency has been valued, then this amount should be processed through payroll in the usual way with PAYE and NI deductions calculated. As the employer wont be able to take the deductions direct from the employee’s pay, then it should be taken from any other cash payment they receive (commission, fees, bonus etc). If the employee is only paid in a cryptocurrency, then they any PAYE must be made good by the employee within 90 days of the end of the tax year in which the non-cash payment was received. Our payroll department can help you set up a payroll scheme.
As VAT is an EU tax, then HMRC has to follow the rules as per the European Union (pending a little something called Brexit).
For VAT purposes, cryptocurrencies will be treated as follows:
- income received from virtual currency mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity.
- income received by virtual currency miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT
- when a cryptocurrency is exchanged for Sterling or any other foreign currency, such as Euros or Dollars, then no VAT will be due on the value of the cryptocurrency themselves.
- charges made over and above the value of the cryptocurrency for arranging or carrying out any transactions will be exempt from VAT under Article 135(1)(d).
Our VAT department can advise you on the VAT treatment of your virtual currency.
Chargeable gains are subject to corporation tax for limited companies and capital gains tax for individuals. As mentioned previously, the profit or loss on foreign currency would ordinarily be within trading profits or the loan relationship rules. If it is not, then it would normally be taxed as a chargeable gain or allowable as a loss for corporation tax or capital gains tax purposes. Gains and losses incurred on Bitcoin, Ethereum or any other virtual currency are chargeable to capital gains tax if they accrue to an individual or, chargeable to corporation tax if the gain accrues to a company.
This is clearly a fast moving and developing technology and we are constantly monitoring tax developments in relation to virtual currencies. If you have a startup that is involved in cryptocurrencies or blockchain and you need advice on your accounts, tax or payroll, please do not hesitate to contact us.