Crypto-Taxation: How Does It Work?

CRYPTOCURRENCY AS AN ASSET

Cryptocurrencies are digital funds with an encryption system to facilitate secure and decentralized transfers from one user to another. Bitcoin, the most valuable and popular digital currency, gained immediate popularity by storming the industries of gambling and investment several years after its release. Now, many users are using it for different online and offline purposes.

With people using the virtual nature of Bitcoin in almost every transaction, goods, and service available, many organization and authorities worldwide realize that the currency is getting harder and harder to track. To prevent Bitcoin from losing its original purpose, the United States Internal Revenue Service (IRS), Her Majesty’s Revenue and Customs (HMRC), and their counterparts from other countries declared Bitcoin as an asset or an intangible property and not a currency—since it is not monitored and regulated by any central authority. This declaration makes the tax implication on bitcoins and other cryptocurrencies undergo several treatments.

TREATMENTS FOR PROFITS AND GAINS

There are three possible treatments for profits and gains on cryptocurrencies:

  • Trading profits
  • Gambling gains
  • Capital gains

Trading profits require a number of ‘badges of trade’ and are therefore subject to income tax. These badges will be the determiner if a transaction constitutes a trade for tax purposes. The conditions include profit-seeking motive, frequency and number of similar transactions, connection with an existing trade, financing agreements, length of ownership, and reason for the acquisition or sale. Moreover, a large number of cryptocurrency transactions done for a short period of time may reflect several badges. Frequent cryptocurrency dealing or profits from regular share dealing, however, are not considered trading profits.

The badges of trade may be present in gambling and betting but according to HMRC, these activities do not constitute trading. Ergo, crypto betting, as well as Bitcoin casino betting gains, are not subject to tax. The main reason behind this is that Wagering has no constant result, each party may either win or lose depending on the aftermath of the game or event. Gambling transactions are typically only a currency wagered between the player and the bookmaker, no chargeable assets are involved.

Capital gains are the holding of foreign currency and selling it at a later date when the rate increased. Since cryptocurrencies are intangible assets, they carry certain rights when bought and sold and are subject Capital Gains Tax (CGT). In the UK, each individual has an annual allowance for CGT which for 2017/18 is £11,300. The treatment and regulation of CGT are different from other countries.

Joan - Team BCF