Almost everyone these days has heard of Bitcoin. Some people have positive and strongly held views of Bitcoin, confident in the belief that it will soon become part of every-day life. Others want it to fail and believe Bitcoin being accepted as a currency is simply a fairy-tale. Either way, the Bitcoin tax man is watching.
Another area of debate is how to tax Bitcoin? Some argue that financial gains made via Bitcoin should be taxed in the same way as any other profits made when conducting business and investments in fiat currencies (fiat is any money declared by a government to be legal tender, such as GBP, USD, EUR etc.).
Others argue an entirely new set of tax rules should be implemented, with different tax rates and legislation specifically for cryptocurrencies.
BTC should be Taxed
The majority of people agree that receiving Bitcoin instead of fiat should not be used as a method of avoiding tax altogether; a view held most strongly by those who don’t hold Bitcoin themselves. After all, BTC investors, traders and users want to see Bitcoin accepted in life as a method of transaction as much as a recognised currency - so why not pay bitcoin tax like we do in the ‘real world’?
What is Bitcoin Tax?
When articles discuss Bitcoin Taxes, it can be applied to a wide range of cryptocurrencies, such as Etherium, Ripple, Litecoin etc. But for simplicity and wide readership appeal, generic BTC tax is the term used to wrap up all cryptocurrency tax.
So what exactly is Bitcoin Tax and how does it work? Let's move beyond the self-explanatory definition - it’s the tax on Bitcoin - and look at the real Tax in question. This is a wide range of moving parts, which vary according to two factors:
The type of transactions you're using Bitcoin for; why you're accepting Bitcoin in the first place, and
Where you're located geographically; and which tax rates and laws that apply to you.
Let’s look at those things in turn –
Why do you own Bitcoin?
There are a few main reasons most people or companies receive Bitcoin (leaving aside Bitcoin as an inheritance for now). Without first knowing and analysing these reasons, your BTC tax approach and tax rate may not be accurate.
Bitcoin received as a means of payment
This refers to anyone accepting BTC as a means of payment for goods or services. Similar to using Visa and/or Paypal; you run your business as you did before, you simply offer another way to receive payment. Often this is only possible when the business also has a bitcoin bank account from a crypto friendly bank - easier said than done. Apply for an account with Harvex.
Bitcoin as an investment
Investing in cryptocurrency. There are a huge amount of people in this category, ranging from those who were fortunate enough to invest at $200 and sell at $18,000, to those who bought at $18,000 and had to sell at $7,000.
What aligns the whole range of those investors is that Bitcoin was purchased and held in order to make a gain on the overall value of the asset. The Bitcoin was not acquired as to be used as a means of making daily transactions, nor was it acquired as a result of selling goods or services.
Thirdly, trading Bitcoin. Buying and selling currency in the hope that you're left with more than you began with. Trading can be used to define buying and selling on a rise in value or shorting a position in a reduction in value. When it comes to crypto this is not a simple definition. But it's trading, rather than an investing. See more on Bitcoin trading taxes below.
Which tax policies and rates should you use?
How is Bitcoin taxed?
Once you’ve determined the Why?, the next step is to differentiate between income tax or capital gains tax on each activity. If you receive Bitcoin as a means of payment, then it's subject to income tax.
If you're making gains on an investment, then this is subject to capital gains tax. In certain cases trading can be a mixture, but in general, the margins gained by the trader are subject to income tax also.
That’s the simple definition.
Paying Tax on Bitcoin - Complexities
In the real world, values fluctuate daily in the highly volatile world of crypto assets. People might part-liquidate their digital assets, sometimes at a gain, sometimes at a loss and leave the rest in their crypto wallet. A wallet of BTC alone (forget the range of other coins you may own) may have been purchased or paid to you at different times with a wide range of equivalent USD, GBP, EUR values.
Then comes a further complication when the different functions of ‘Why you have the Bitcoin’ merge together;
BTC Tax Example
Mrs Smith consults for a company for a fee of $7,000 and accepts 1 BTC as payment. She leaves it in her (crypto) wallet for a week or so. By the time she decides to liquidate her BTC to fiat, it's now worth $8,000. So, Mrs Smith decides to liquidate $4,000 and leave the rest as crypto. And then by the end of that tax year, the remaining crypto is worth $6,000.
In this case, Mrs Smith has both received Bitcoin as a means of payment, and held crypto assets as an investment, though at the end of the year she has only received as income $4,000 in fiat vs an invoice she raised of $7,000.
Crystal clear, yes?!
The most important aspect for anyone using Bitcoin when considering your tax position is to fully understand and appraise the nature of all your transactions – You could reduce your tax considerably by doing this correctly.
When assessing your tax position, take your time to understand the flow of the crypto funds: What was it used for? For how long was it held? - and, if it's still held, what was the fiat equivalent at each taxable point?
Unlike the above example with Mrs. Smith, the values in the real world are seldom nice rounded numbers, and the full assessment in Mrs. Smith’s case, is also dependent on where she is a tax resident, whether she conducts this transaction personally or through a Company and the respective tax rates for the different nature of her transactions.
This is where we come in. Harvex are dealing with these types of scenarios for clients around the globe on a daily basis.
Bitcoin Trading Tax
Crypto trading is a multi-billion-dollar business and is growing daily, so let’s look at this area in some more detail.
As mentioned earlier in this article, Bitcoin trading is a profession and you’ll likely be taxed as such. Why is this important? Well, the answer is that in the vast majority of tax jurisdictions income tax is higher than capital gains tax – as is the case in UK and Malta. So, if you trade Bitcoin, you will be subject to income tax - HMRC Cryptocurrencies.
When considering Bitcoin trading tax, the main criteria is how do you value the Bitcoin you're buying or selling? Traders will seldom sell 100% of their Bitcoin, which means they retain a balance in their BTC wallet. That balance will have accumulated with a wide range of spot rates. We need to factor in the fiat exchange rates on the days deposits and withdrawals were made.
Plus, if you hold a USD account for Bitcoin transactions, we need to work out the FX movement to GBP or EUR.
Interpreting Exchange Reports for Bitcoin Tax
One of the major headaches for most Bitcoin Tax calculations is interpreting the exchange tax data. Some traders complete hundreds of transactions a day, across a wide range of exchanges or direct OTC deals.
The data itself usually makes sense at first glance: date, time, BTC bought or sold and the USD/GBP/EUR rate for the transactions. However, for tax purposes this data needs to be analysed in detail.
What to do:
At Harvex we know this is complex. There are key tax rules to consider with Bitcoin trading:
Buying Bitcoin (or any digital currency) is not a taxable transaction itself – the tax will be triggered when you sell at a gain.
If your Bitcoin has gained value, but you hodl and don't sell it (for fiat currency) – you will not trigger a BTC tax charge.
To understand and correctly tax crypto trading profits –
You need to work out the gain (or loss) on EACH transaction. This means translating the purchase price on the day of purchase, to the sale price on the day of sale.
Work out which trades you settled in fiat, and the conversation rate on the day.
Calculate which trades you settled into another cryptocurrency.
Figure out the wallet balance values at the end of the tax period.
This may be a time-consuming process, but it's essential to either pay the correct tax - either in the current year, or rolling it forward the correct tax positions for future years.
I lost some money on trades, what do I do?
If you made a profit trading Bitcoin (BTC), and lost money trading Ethereum (ETH), and realised both the gain and loss in fiat, then it's most likely permissible in this scenario to net this gain and loss against each other, as although the transactions were in different cryptocurrencies, it may be classified as the same ‘trade’ in the eyes of the tax authorities like HMRC.
This isn’t always the case, however… so you should seek an expert’s advice. For instance, if you made a profit trading BTC and converted it to fiat, and lost money trading ETH vs say LTC, you’d be best contacting us at Harvex to discuss this.
Can I pay zero tax on Bitcoin earnings?
We’ve spent a lot of time talking about tax on Bitcoin, how it's taxed, why it's taxed in the way it's and the complexities involved. But – is there another way?
Tax Free Bitcoin
In some cases, yes, gains from Bitcoin transactions can be tax-free. In countries where tax residents pay 0% tax, it’s logical that in those countries, gains made from Bitcoin transactions would be tax free in the same way that other tax-free income might be. But note that this isn’t a special tax-free status for Bitcoin, it's a tax-free territory to start with, which is a big difference.
Remittance only tax
A few countries operate a ‘remittance only’ basis tax structure, initially set up with fiat in mind for individuals who own an internationally based business. The idea originally was to bring wealth into their countries from abroad. You can find out more about the benefits of moving to Malta for example.
However, with Bitcoin, there is more flexibility as this is underpinned by the fact that the server which holds the Bitcoin could be based internationally from where you live. In effect, even if you run your entire business – you're not remitting money to that country if you receive it in Bitcoin.
You only pay when you sell
Only when you liquidate your Bitcoin (convert it to fiat) and pay it into that particular jurisdiction are you taxed on it, the rest can remain tax free!
In fact this arrangement has become so attractive, people are moving countries to achieve this tax status.
Tax-free Gains as Gambling
One thing that is highly unlikely to stand up to a tax authority inspection in almost every jurisdiction is declaring your Bitcoin gains as gambling income. It’s a nice thought, and it can feel like a huge gamble hodling crypto, however as a way to avoid paying tax you’ll likely fail making this claim.
In the UK, USA and most of the EU, the tax authorities have no time for this ‘loop hole’. It's difficult to argue the case that holding Bitcoin, which rose in value by 4000% in 12 months, whilst the hodler did nothing, is comparable to buying some chips from the casino, leaving them in your pocket and selling them 12 months later.
This article covers topics relevant for UK & Maltese Tax Individuals & Companies and is provided for informational purposes only. For tax enquiries please contact firstname.lastname@example.org
Since we began working in Blockchain and Crypto in 2016, Harvex have been the perfect partners for everything to do with our finances. We're able to accept any currency, handle our FX and brokerage and they secured our bank account. Along with handling all our accounts and tax, we couldn't cope without Harvex.