Heightened publicity around the potential profits to be made from bitcoin is likely to lead to HMRC taking action against those reaping the rewards of the cryptocurrency's meteoric rise, according to tax experts.
Bitcoin - a type of electronic currency which works without a central bank or single administrator, in a peer-to-peer network where transactions take place directly between users - has risen in value by 1,600 per cent in 2017.
A single bitcoin is currently valued at £13,039 ($17,500) on 15 December. At the start of the year it was worth just around £750.
Andrew Bailey chief executive of the Financial Conduct Authority (FCA) has said bitcoin is not a currency, but instead it is a commodity. He added that investors in bitcoin must be willing to lose all of their money, but that at present the asset is too small too pose a risk to the wider financial system.
However Robert Langston, tax partner at Saffery Champness, said the astronomic increase in the value of the new currency may mean HMRC starts to look closely at the profits made from Bitcoin trades as the perception may exist that the electronic currency is a way to make tax-free gains.
He compared it with Ebay, where he said HMRC set up a dedicated team to investigate gains made by people trading items on the site after the view took hold that the gains were free of tax.
“It is most analogous to share dealing. People have tried in the past to claim losses accrued from dealing in shares as a way of reducing their income tax bill, but that case law has rejected this.
"Though losses made on bitcoin can be used to mitigate capital gains made elsewhere, the gains are taxable at the prevailing capital gains tax rate," he said.
Bitcoin is created by a process known as "mining" which uses computer processing power to create and solve unique algorythms,. A bitcoin is created when one of these algorythms is completed.
According to HMRC, those who create bitcoin will not be liable for VAT as the Revenue service does not see a sufficient link between the economic activity of creating the bitcoin and the subsequent sale.
A spokesperson for the tax authorities said any gains are liable for capital gains tax at the normal rate, and they not see the need for any “bespoke” rules for bitcoin trading "at this stage".
Nimesh Shah, tax partner at Blick Rothenberg said those who trade bitcoin in a very regular and systematic way may find the gains treated as income, and be liable for income tax.
However Mr Langston said the hurdle to prove that profits from bitcoin are income rather than capital gains is likely to be “high”. For many taxpayers their income tax rate is higher than the current level of corporation tax.
Crucially Mr Langston said investors will not be able to reply on a commonly held idea that any profits from trading bitcoin are the result of speculation, the equivalent of gambling, and that as gambling winnings are not subject to tax, so nor should gains from bitcoin.