Bitcoin investors still hurting after its value plunged in early February are being told not to expect the tax man to "come to the rescue" and allow them to offset capital losses, even though it is likely to tax those who gained.
According to tax specialists, the fact cryptocurrency is still in its infancy, coupled with the highly speculative investment case that saw values of all the main virtual currencies rise exponentially last year, means HM Revenue & Customs has not been able to provide a "definite answer" as to how it will treat people who cashed out in January.
People who made a gain are likely to incur a tax penalty, but those who made a loss may not find they can offset this in the way other investments can be offset by using carry forward rules, for example.
George Bull, senior tax partner for RSM UK said he expected there would be capital gains tax (CGT) and income tax liabilities for investors in bitcoin and its virtual peers for those people who exchanged these for fiat currencies or goods and services when the price was soaring.
If bitcoin owners incur huge losses following the recent slide in values, don't bank on HMRC coming to the rescue with tax relief for those losses. George Bull But he said those investors who cashed out too late and crystallised a loss cannot offset this against any investment losses, unlike investors in qualifying investments who can offset trading losses against capital gains.
This is because the speculative nature of cryptocurrency investing is considered by HMRC to be "more akin" to gambling.
Mr Bull said: "HMRC's guidance makes it clear any transaction using cryptocurrencies must be looked at on a case-by-case basis, taking into account the specific facts.
"HMRC goes on to illustrate this with the example of speculative transactions, which may not be taxable because they are much more akin to gambling and betting."
Usually, any gains made from gambling or lottery wins in the UK are not taxable, which means investors losing out cannot offset any tax losses in a given year.
But capital gains on investments, such as UK listed stocks and shares, are treated as taxable, so capital losses from such investments can be offset by carrying forward any unused CGT losses from previous years.
Any such CGT losses that are carried forward have to be used against the first available capital gains. This means that investors can reduce their capital gains to the yearly allowance amount and carry forward the remaining losses.
Yet HMRC appears to be treating cryptocurrency like an investment for the purposes of taking income tax or CGT, but not treating it like an investment on the way out.
Mr Bull called this duality a "sting in the tail" for people investing in the cryptocurrency trend.
He continued: "If Bitcoin owners incur huge losses following the recent slide in values, don't bank on HMRC coming to the rescue with tax relief for those losses."
Emily Coltman, chief accountant to FreeAgent, said: "I would urge anyone who has made money from [cryptocurrencies] to contact HMRC directly to check whether they need to include such information in their self-assessment tax returns or in a different capacity."
Find out more
To learn more about the tax treatment of cryptocurrency, as well as the risks and the rewards involved, FTAdviser has published a guide to Bitcoin and blockchain, which qualifies for approximately 60 minutes' worth of CPD. To read the full guide and claim your CPD, click here.
simoney.kyriakou@ft.com
