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I'm a basic-rate taxpayer employed in IT and, by an amazing bit of luck, bought 1,000 bitcoins in 2012 for £5 each. I've been told they are now worth more than £4 million at the current exchange rate.

As this is a virtual currency, does that mean I have to declare the sale for tax purposes? I've been told any gain is tax free because the money doesn't really exist in tangible form.

 

Geraint Jones, tax adviser at London and Cambridge accountancy firm BKL, replies: Virtual currencies, or cryptocurrencies as they are sometimes known, are becoming an increasingly popular way to transact.

As a result the value of some cryptocurrencies has risen beyond belief, and you are by no means unique in having become a bitcoin millionaire. 

However, cryptocurrencies do have tax implications of their own.

HMRC has not introduced any new legislation that relates specifically to cryptocurrencies as it believes that the existing legislation is sufficient to impose any necessary tax.

By far the most popular cryptocurrency is the bitcoin, however there are approximately 1,000 such currencies with others, such as ethereum and litecoins, becoming increasingly popular.

Individuals can obtain cryptocurrencies such as bitcoins in two ways. One is via 'mining', which is a system that allows computer users to calculate complex algorithms required to verify each transaction in the blockchain and be rewarded with bitcoins.

The second way is to use a bitcoin exchange to purchase bitcoins with a real world currency such a sterling.

If someone is mining bitcoins then HMRC regards this as a trade and will charge any profits to income tax and national insurance. Income and expenses would need to be calculated in sterling each year with the profits reported to HMRC and tax duly paid. Any expenses claimed would need to relate solely and specifically to the trade of mining.

If the bitcoins have been purchased HMRC will regard any increase in value as being liable to capital gains tax. Tax will only crystallise when the bitcoins are converted into another currency, be it sterling or dollars or even another cryptocurrency. Capital gains tax is currently charges at ten per cent or 20 per cent (or a mixture ) depending on the level of the taxpayer’s other income. 

Therefore in the situation above, the bitcoin seller is liable to capital gains tax on the gain arising. As the current price of a bitcoin is approximately £4,500 that would lead to a capital gain of £4,495,000 (£4,500,000 less £5,000) which after a capital gains tax exemption of £11,300 leaves a tax liability for a higher or additional rate taxpayer of £896,740.

Any tax liabilities relating to either mining or investing in virtual currencies which arose in the year to 5 April 2017 needs to be reported to HMRC with any tax paid by 31 January 2018. If the individual concerned does not have a filing reference an immediate application needs to be made on form SA1.

Sooner or later HMRC will catch up with cryptocurrency users who have made large gains because they will probably transfer the monies back into a traditional currency at some time.

Remember, just because cryptocurrencies are unregulated does not mean they are not taxable.

RACHEL RICKARD STRAUS

This is MONEY