Bitcoin has been in the news recently as increasing numbers of people have been looking to make money through buying and selling this new ‘cryptocurrency.’ But what is bitcoin? Can it make a good investment? And where do HMRC fit into the picture?
Bitcoin is a ‘cryptocurrency.’ Essentially, that means a digital currency generated by a network of computers using sophisticated mathematical formulae. The process of production is called bitcoin ‘mining.’ Bitcoin can be used for electronic transactions, but it has no actual physical form.
The origin of bitcoin is shrouded in mystery. It was ‘created’ by ‘Satoshi Nakamoto,’ a name which seems to be an alias. Various people have claimed to be – or denied being - Satoshi Nakamoto – including Tesla chief, Elon Musk.
According to the European Central Bank (ECB), bitcoin is ‘virtual, yes, but currency, no.’ That is because unlike, say, the pound or euro, bitcoin is neither issued nor guaranteed by a central, accountable public authority. Another downside cited by the ECB is that there is no protection for those who use bitcoin – it can be stolen by computer hackers. Nor is bitcoin universally accepted as a form of payment.
The ECB’s final word of caution is that bitcoin is ‘too volatile … Its value has both skyrocketed and tumbled dramatically all within the space of a few days.’
Investment or nightmare?
Analysts describing bitcoin use the vocabulary of drama: words like ‘plummet,’ ‘plunge’ and ‘unpredictable.’ From a record high of $19,850 in mid-December 2017, bitcoin hit a very rocky patch. At one point before Christmas, its value fell by nearly $2,000 in one hour alone.
Safe as houses, it certainly isn’t. Prime Minister, Theresa May, is considering action against cryptocurrencies because the fact that they can be traded anonymously makes them open to use in criminal activity. One recent report suggested that half all bitcoin transactions are linked to illegal activity of some kind. In the WannaCry ransomware attack that hit NHS computers in 2017, it was bitcoin that was demanded by the hackers. Traditional watchdogs, like the Financial Conduct Authority, at present have no powers of regulation over bitcoin.
Bitcoin – an Inspector calls
Despite the risks, some people have taken to bitcoin speculation, and HMRC are not unaware of the fact.
Dealing in bitcoin can be a taxable activity. The question will be whether the buying and selling amounts to a trade, and so is chargeable to income tax: or is a chargeable gain on an investment, and so liable to capital gains tax: or whether it is so highly speculative that it is classed alongside activities like gambling and betting, and so is not taxable, nor can any losses be offset against other taxable profits. HMRC have said that they will decide on a case by case basis whether profits or gains are chargeable, or losses allowable.
HMRC published guidance in 2014. It has not been updated since, although HMRC advise that ‘given the evolutionary nature of these cryptocurrencies,’ they will issue further guidance as appropriate.