By Simon Vincent, Senior Tax Accountant at Hive Business

If you know any cryptocurrency investors, it’s unlikely they could conceal their joy at the wild gains in dollar price late last year — you probably got bored of hearing their gloating at dinner parties. But you may not have heard from them since they watched much of those gains drain away overnight. Or was it you? My sense is most dentists are too risk averse.

The price of Bitcoin has seen a lot of chop since its peak of almost $20,000 in the week before Christmas. It fell under $6,000 on February 6 before settling at above $8,000. Most alt (alternative) coins, of which there are now thousands, have broadly followed suit.

That’s an incredible chart for an asset class in such a short space of time, and no one has a clue if there’s another dip around the corner, or if the upward tilt will continue. But gut-wrenching peaks and troughs have happened before with Bitcoin, many times.

It still boasts a return of around 780% since its low in December 2016, which compares with a 24% return for the Dow Jones Industrial Average. It clearly has its flaws, summarised by the European Central Bank on its website in a graphic entitled “Why is Bitcoin not a currency?” The ECB makes four points: no one is backing it, it is not widely accepted, users are not protected, it is too volatile.

Interestingly, HMRC has been quiet on the subject since it gave its views all the way back in 2014. Then it reminded cryptocurrency investors when they might need to pay tax, and what to do if someone buys something from your business using Bitcoin. But, unsurprisingly, the general theme was “we have rules about tax and they cover Bitcoin just the same”. However, this has yet to be tested in court.

We will probably get something more specific in the next budget, but even if that doesn’t happen there are still a lot of people invested in cryptos who need to think about tax, because HMRC will certainly claim it is taxable.

Two types of tax can apply here: income tax and capital gains tax. Income tax is appropriate when you are trading frequently, which is decided on a case by case basis. Your trading tax is going to be 40% plus national insurance contributions, so 42% in all.

In the current tax year many people made money in cryptos, and over the next year you will hear about a lot of associated problems that people haven’t thought of yet. One is going to be the big tax bill they hadn’t anticipated. Many investors have a tax bill coming that they don’t even know about.

Despite HMRC’s view that existing tax provisions adequately deal with these currencies, the ECB states that Bitcoin is so highly speculative that it is a gamble. But gambling is outside of the scope of tax in the UK, the corollary being that any favourable loss relief is unavailable. HMRC even references gambling in its own article, saying “a transaction may be so highly speculative that it is not taxable”, so is it hedging its own bets?

Murmurs in the tax world suggest that investing in crypto isn’t gambling (one definition being that gambling is an activity that doesn’t involve buying or selling anything, merely placing a bet and hoping to win). Ultimately, I suspect it’s going to take a brave individual to argue the point and take this through the tribunal system. No doubt somebody will have played the game just right and will be sitting on a gain large enough to justify such action.

If investing in cryptos feels like gambling, it also feels like converting currencies, which isn’t taxable either. Indeed, Bitcoin is listed as a currency on XE, the foreign exchange website. So it will be interesting to see what they say in the upcoming budget, and I expect someone from HMRC will be commenting.

It remains to be seen what happens to the value of cryptocurrencies, but it feels not entirely dissimilar to the way my parents’ generation stuffed us over on house prices. The fact is, most people get on the boat or miss it by dint of their age. Crypto investors in the UK are most likely to be 18-24 and least likely to be over 55.

I expect crypto prices will eventually get steadier, and it’s probably where currency is going, despite what the ECB says. At the moment though it’s difficult to see what tangible basis there is for value in cryptos, except the excitement they engender. But that matters; after all, things are worth what someone will pay for them.

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