Showing posts with label bitcoin. Show all posts
Showing posts with label bitcoin. Show all posts

Thursday, November 14, 2019

UK Tax treatment of Crypto-Assets for Businesses

HMRC published a guidance note last year (see our article) on the taxation of cryptocurrencies for individuals. They have now produced a similar document for businesses (see gov.uk website). The HMRC's approach in this policy paper is, as expected, conservative, and it stands in line with other countries’ tax treatment for cryptocurrencies. It's noteworthy however that the HMRC explicitly states that it does not consider crypto as a currency, and the policy paper is careful to use the term "crypto-asset" instead of "cryptocurrency" throughout.

Corporation Tax

Where a token/crypto-asset is being used in a trading activity, companies are to be taxed on their trading profits. Profits need to be calculated in GBP therefore all transactions need to be converted into GBP at the time of the transaction.

Where a token/crypto-asset is used in a non-trading activity, it is be treated as an investment and so any gain on disposable is to be subject to CT on chargeable gains. Some but not all costs can be allowed as a deduction when calculating the gain. Cost of mining for example is not allowed unless the mining activity is done as a trade. The calculation method is following section 104 of the TCGA 1992 i.e. using a pool per asset class but with slightly different anti-bed-and-breakfast rules (a sale is matched against the pool unless a purchase happen in the next 10 days -- and not 30 as usual). And in case of a hard fork, cost base needs to be split on a "just and reasonable" basis.

Monday, September 9, 2019

Pensions: the Lifetime Allowance time bomb

With rates at historical lows, with $9.5 trillion worth of government debt carrying negative yields and with governments around the world addicted more than ever to Quantitative Easing, fiat money around the world is losing its value faster than ever. It means that the value of a pension fund invested in hard assets (and yes Bitcoins are also an option...) is more susceptible than ever to go over the The Lifetime Allowance (LTA) at some point. Indeed, you just need an 8% annual return over 20 years to multiply the value of your pension by a factor of 5!

The Lifetime Allowance (LTA) is the overall limit a pension plan can reach before its owner is being penalised by a 55% tax upon withdrawal. The Lifetime Allowance after having reached £1,800,000 in 2011/2012 was reduced all the way down to £1,000,000 in 2016/2017 and stayed there for a couple of years before starting to increase again with the CPI (consumer price index) in 2018/2019. It is now at £1,055,000 (2019-2020).

The government tests your pension against the LTA when you take a benefit (eg you take a drawdown or an annuity) or when you reach the age of 75. It's called a benefit crystallisation event (BCE). Nowadays, the most popular way to extract money from a pension is through flexible drawdowns. When take your benefit via a drawdown, 25% of the drawdown is tax free cash and the rest goes into drawdown mode where it can continue to be reinvested tax free. The money can be taken at any point from the drawdown pot and is taxed as income on the taxpayer when it is taken. The drawdown amount (including the cash free element) is compared to the LTA at the time of the drawdown and the corresponding percentage is added to the ones from the previous drawdowns. If you end up over 100% then the additional amount above the current LTA is either taxed at 55% if you take if out of the drawdown pot immediately or 25% if you leave it there (and it will be taxed a second time as income when you take the money out of the fund).

Tuesday, August 6, 2019

HMRC asking for records of Crypto Exchanges

With Bitcoin looking like it's here to stay, HM Revenue & Customs, is now pressuring crypto-currency exchanges to reveal customers' names and transaction histories, in a bid to claw back unpaid taxes, industry sources said. Letters requesting lists of customers and transaction data have landed on the doorsteps of at least three exchanges doing business in the U.K. – Coinbase, eToro and CEX.IO – in the last week or so, the sources said.

The move is following a pattern set by the U.S. Internal Revenue Service (IRS) and other governments. Last month, the IRS began sending warning letters to over 10,000 Americans who it says participated in virtual currency transactions but did not report them properly.

HMRC is looking to get up to 10 years worth of historical data but that might prove difficult to achieve. Still, even if the administration manages to go back 3 years, it would mean serious tax bills for those who thought trading virtual currencies was a tax free endeavour! HMRC published in 2018 a policy paper explaining the tax treatment of crypto-assets. As described in the paper, for most people, capital gains tax will be due on any gains they might have realised. But doing the calculation of the gain might prove more complex than with other securities. Indeed, transferring bitcoins in or out of an exchange is not a taxable event per se. And conversely, buying something with Bitcoin or receiving income in crypto-currency is a taxable event!

This is why it's crucial to keep records or all transactions and refrain from using crypto-currencies as a payment currency, at least until there is a de minimis exemption like with other currencies. As, even if your gains are below the annual allowance of £12,000 (for 2019/20), you still need to declare the sales if they total more than 4 times the annual allowance, i.e. £48,000. For people who don't already do a tax return, it means registering for Self Assessment. And if you are aware of gains that you have failed to declare in the past, it's a good idea to come forward and call HMRC to avoid steeper penalties.

Thursday, December 20, 2018

Tax treatment of cryptoassets: an update from HMRC

HMRC published this week a new policy paper on the tax treatment of crypto-assets. The previous paper was from 2014 (see our previous article on the subject) and this one goes into further details  but only concerns the individual taxpayer. The government has promised a further update for corporations at some point in the future.

In the paper HMRC defines 3 types of assets: Exchange Tokens (such as Bitcoin and most crypto-currencies and that can be used as payment rails), Utility Tokens that provide the holder with access to specific goods or services (such as those issues during an ICO) and Security Tokens which provide the holder with interest in a business (either debt or equity).

Essentially, individuals will be liable to pay either Capital Gains Tax (CGT) if investment is casual or Income Tax (IT) if they are actively involved in the trading of the cryptoassets. The paper goes into quite a lot of details and specifies many possible scenarios and their tax treatment but here are a few points that are worth noting:

Friday, December 6, 2013

Taxing Bitcoins

Because of Bitcoin skyrocket increase this past year from $17 to over $1,200, you cannot escape hearing about those cryptocurrencies and how they will change world commerce for ever. While the Federal Reserve gave tacit approval, stating “virtual currencies like bitcoin have legitimate uses and should not be banned,” and while it's been acknowledged by the Chinese authorities as a valid currency (even though Banks have yet to gain authorisation to use it) there is still a lack of guidance from the tax authorities as to how those new currencies should be treated. There are basically 2 possibilities on how Bitcoins should be treated for tax purposes: either as an intangible asset or as a foreign currency. If a Bitcoin is considered an asset, profits will be taxed as capital gains, i.e at either 18% or 28% depending on your tax band. However if it's considered a foreign currency, then profits will be taxed as income, and therefore as high as 45%.

The problem with saying that it’s a currency is that it is not issued by a government, and traditionally currencies are legal tender issued by governments. In California Bankers Assn v. Shultz, the Supreme Court stated (in a non-tax context): “‘Currency’ is defined in the Secretary’s regulations as the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.”