Bitcoin may be a gamble, but you could still face a tax hit

I have an admission to make. Perhaps it is my accountancy training, but I find it very difficult to put a value on Bitcoin. Then again, I wholly failed to appreciate the value of an online bookshop when Amazon floated on the stock market.

Nevertheless, fortunes have been made and lost by dealing in cryptocurrencies and HMRC is not about to miss out on this bonanza. First, a few fundamentals. If you make a gain on holding foreign currency this may, strictly speaking, generate a taxable gain. In practice, this rarely happens because gains on foreign currency held for personal expenditure are exempt.

However, Bitcoin and other crypto assets are not treated as currencies for tax purposes, so this exemption is not available. Also, while gambling profits are tax free, HMRC does not treat dealing in cryptocurrencies as gambling. In the vast majority of cases, profits made on Bitcoin will be treated as a capital gain with the same rules applying as for shares. If you sell Bitcoin at a profit, you will be able to set against it your available capital gains tax annual exemption, currently £12,300.

If you buy at different times, you will need to keep records of the additions and sales from your pool. A disposal is subject to the same “matching rules” as for shares, with the same-day rule and 30-day “bed and breakfast” provisions applying if you sell and repurchase in a short period of time.

If you are married or in a civil partnership, you can give Bitcoin to your spouse tax free and they can make gains using their own CGT annual exemption. You may want to do this using a “declaration of trust”.

If you make losses, they can be set against gains in the same tax year on shares or other assets. This only applies to realised losses. Some unfortunate individuals have lost their Bitcoin access “keys” and may never be able to recover their investment. Sadly, HMRC does not regard this as a disposal on which a capital loss can be claimed on the basis that the asset is still there – you just can’t access it.

A couple of points you should keep in mind. Because crypto assets are not regarded as currency, you cannot pay them into a pension fund and obtain income tax relief. On the other hand, they are still assets that have a value, which means that they will be part of your estate on death for inheritance tax purposes.