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Author Topic: UK Question - Withdrawing and the Tax Man Issue  (Read 2172 times)
ChridD
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July 16, 2011, 10:16:26 AM
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Hello everyone i'm new and restricted to this forum so having to dump this here.

I have been buying and selling bitcoin for a while, trying to trade in it for a little extra income. The problem i have is withdrawing. I imagine lumps of cash dropping into my account every week or so will raise suspicions with the tax man. Of course i'm not doing anything illegal but it'll be a lot of hassle.

Whats a good way to withdraw and avoid the tax man issue? Basically avoiding my bank account basically.
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ChridD
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July 16, 2011, 10:26:35 AM
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I don't mind declaring the income you misapprehend my reason for wishing to not have regular payments into the account, it isn't about avoiding tax. My concern is having the tax man thinking i'm doing something illegal. I'm not but trying to explain bitcoin and all it involves does seem suspicious i'm sure.

See i'm not a tax avoiding bum, i'm a "wanting to avoid the hassle of being questioned and suspected of foul play" bum.
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July 16, 2011, 10:30:07 AM
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I don't mind declaring the income you misapprehend my reason for wishing to not have regular payments into the account, it isn't about avoiding tax. My concern is having the tax man thinking i'm doing something illegal. I'm not but trying to explain bitcoin and all it involves does seem suspicious i'm sure.

See i'm not a tax avoiding bum, i'm a "wanting to avoid the hassle of being questioned and suspected of foul play" bum.
Fair enough, you shouldn't really worry, buying and selling bitcoins isn't much different to doing the same with the gold or silver market.
Just keep all your transaction records for at least 5 years, pay the tax and sleep easy at night. If the tax man comes knocking, you have all your paperwork to throw straight back in his face if foul play is suspected.

Alex Beckenham
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July 16, 2011, 10:32:10 AM
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Why is it suspicious to receive regular income?

Isn't 'lumps of cash dropping into your account' what having a job is all about?


jim618
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July 16, 2011, 10:35:05 AM
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You most likely would end up doing a 'full' tax return rather than the usual 'short' tax return.
A bit more paperwork but nothing serious.

I have been audited by HMRC in the past and the secret is to pay promptly and be polite in all your correspondence.   If you are late or stroppy they can fine you 'the same again' i.e. you owe £5000, and the fine is another £5000'.

It is actually worth overpaying slightly if you are in any doubt as that shows you are not trying to con them.   You always get the money back in the end so it's no real loss.

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ChridD
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July 16, 2011, 10:35:59 AM
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Receiving regular income isn't suspicious at all, but bitcoin has a rather unfortunate reputation due to the criminal element.

As for records, which should i keep? The bitcoin numbers i buy and sell from and the mtgox information, would that be enough do you think?
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July 16, 2011, 10:37:12 AM
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oh - and if you are married and your wife is not working you can get her to cash the money out and it uses up her tax allowance.
I believe assets are freeing transferable between spouses so it is perfectly kosher.

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jim618
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July 16, 2011, 10:39:06 AM
 #8

RE: records - if you have:
o date bitcoins bought, quantity, price, where from
o date bitcoins sold, quantity, price, who to

I think that would cover it

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ChridD
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July 16, 2011, 10:42:49 AM
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RE: records - if you have:
o date bitcoins bought, quantity, price, where from
o date bitcoins sold, quantity, price, who to

I think that would cover it

Thanks jim that's a great deal of help, i must admit i would rather pay the tax and sleep soundly Smiley If anyone thinks i need to keep other records to be extra safe please feel free to suggest which ones.

Thanks again to everyone who replied so far.
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July 16, 2011, 10:45:05 AM
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Thinking about it a bit more, buying and selling bitcoins would be covered by capital gains tax rather than income tax.

If you have a look at:

http://www.hmrc.gov.uk/cgt/intro/basics.htm

you get taxed on the gain in value and I believe it tapers off over time.

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Grant
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July 16, 2011, 10:46:29 AM
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Receiving regular income isn't suspicious at all, but bitcoin has a rather unfortunate reputation due to the criminal element.

As for records, which should i keep? The bitcoin numbers i buy and sell from and the mtgox information, would that be enough do you think?

Ive been doing business in virtual worlds for a couple of years (both buy low sell high speculation and actual business), only records i ever delivered to my taxman is the actual withdrawal (and deposit), nothing inside of the virtual world. I consider mtgox a virtual world aswell Smiley

Alex Beckenham
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July 16, 2011, 10:47:25 AM
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Thinking about it a bit more, buying and selling bitcoins would be covered by capital gains tax rather than income tax.

What if you buy and sell 1000 times per day? Do you need to list every single trade or just show each day's profit/loss (like daily 'income')?

I've traded FX for income and must have made over 20,000 trades in 12 months... I just declared my overall profit for the year as income (in Australia).

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July 16, 2011, 10:48:16 AM
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Whats a good way to withdraw and avoid the tax man issue? Basically avoiding my bank account basically.

You answer your own question. Basically avoid your bank account. Try exchanging bitcoins for cash or, better, use them to buy stuff instead of cashing out.
If you cash them into your bank account in a considerable amount, that might bring you the tax man. I have no idea what would be a "considerable amount" in UK, though.
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July 16, 2011, 10:58:04 AM
 #14

To be frank, the more you declare and the more complicated you make it - the more aggro you'll get and the more chance you'll stand of ending up audited by HMRC.

There aren't going to be many R&C auditors familiar with Bitcoin (though probably more than those familiar with those 'virtual world currencies' which are a similar kettle of catfish) and you're right, there will be immediate suspicion. It's very sad, but a natural human reaction to something that one does not understand.

Declaring everything is the upright-citizen 'correct' thing to do, but I seriously wouldn't bother unless it's your only source of income. I'd probably keep the money offshore in my swiss account, CHF is very strong at the moment anyway (but watch carefully for efforts by the swiss national bank to devalue to make their exports more competitive... it's hurting them right now).

If you MUST declare it all, I'd try to make it look like bog-standard FX trading. Bitcoin is just another currency, right? And if you account for all transactions as standard FX movements then your average taxman will understand *everything* you're doing. This is probably your best bet if all you're doing is trading... if you're actually selling goods and services (whatever those may be) then you'll end up having to explain exactly *what* those goods and services really are. Whether you would appreciate this is your business entirely...

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jim618
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July 16, 2011, 11:03:30 AM
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@Alex

Yes - that does make more sense I must admit.   Capital gains is usually on things like houses, cars, valuable that you keep for a while.
If you are trading kilotrades and declare it as a profit that is taxable I can't see the tax man complaining.

That is about the limit of my knowledge - my head is starting to spin already !

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ChridD
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July 16, 2011, 11:12:02 AM
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If you MUST declare it all, I'd try to make it look like bog-standard FX trading. Bitcoin is just another currency, right? And if you account for all transactions as standard FX movements then your average taxman will understand *everything* you're doing. This is probably your best bet if all you're doing is trading... if you're actually selling goods and services (whatever those may be) then you'll end up having to explain exactly *what* those goods and services really are. Whether you would appreciate this is your business entirely...

...catfish

Yeah this is my concern, i'm not selling goods or services, just trading so i can keep track of the various trade numbers that are public. However i imagine even this may not be good enough for the taxman due to the nature of bitcoin.

It is sad there is so much suspicion surrounding bitcoin. I am grateful for your more detailed help.
ChridD
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July 16, 2011, 11:13:25 AM
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Ive been doing business in virtual worlds for a couple of years (both buy low sell high speculation and actual business), only records i ever delivered to my taxman is the actual withdrawal (and deposit), nothing inside of the virtual world. I consider mtgox a virtual world aswell Smiley

Could you clear something up for me? If you are a part of games like second life, how would you account for the income? I mean if the tax man got all uppity and wanted an audit would they simply apply to the game for records or do you keep them yourself?

Just curious as it may apply to this situation.
zerokwel
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July 16, 2011, 11:20:15 AM
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for me I have told them nothing so far. For one reason I have not transferred any money into my account. I have exchanged bitcoins into items ie gfx cards and silver.

So what am i meant to tell them. ohh i had some bitcoins and I got some silver and a gfx card. what do i owe ya. They would think i was nuts
ChridD
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July 16, 2011, 11:31:24 AM
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for me I have told them nothing so far. For one reason I have not transferred any money into my account. I have exchanged bitcoins into items ie gfx cards and silver.

So what am i meant to tell them. ohh i had some bitcoins and I got some silver and a gfx card. what do i owe ya. They would think i was nuts

Little tip for life, when you ask a tax man what you owe him, he will give you a number Smiley
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July 16, 2011, 12:35:54 PM
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If you MUST declare it all, I'd try to make it look like bog-standard FX trading. Bitcoin is just another currency, right? And if you account for all transactions as standard FX movements then your average taxman will understand *everything* you're doing. This is probably your best bet if all you're doing is trading... if you're actually selling goods and services (whatever those may be) then you'll end up having to explain exactly *what* those goods and services really are. Whether you would appreciate this is your business entirely...

...catfish

Yeah this is my concern, i'm not selling goods or services, just trading so i can keep track of the various trade numbers that are public. However i imagine even this may not be good enough for the taxman due to the nature of bitcoin.

It is sad there is so much suspicion surrounding bitcoin. I am grateful for your more detailed help.
Assuming here (from the talk of HMRC) that you are domiciled for tax purposes in the UK, you are meant to declare all income *repatriated to the UK* in your SA return. I may be wrong, but IIRC money earned abroad and not returned to the UK isn't taxed in the UK. It's not like the US system where the IRS requires *all* globally earned income to be taxed in the US.

So you have to firstly account for where the income actually moves from and to. Bitcoin is tricky because the Internet is a somewhat difficult 'nation state' to identify (the correct answer to this question will need a very tech-savvy tax lawyer's contribution). Personally, whilst the Bitcoins are still in your Bitcoin wallet, I say they're offshore from ALL tax jurisdictions and it's up to the tax jurisdiction to specifically pass legislation to grasp control of 'sums' of Bitcoin 'currency' before this 'money' can be taxed. After all, given the current status, Bitcoin is no different to your 'money' attribute in some big multiplayer online game... though I may be out of touch since I'm old and stopped playing games around the time of the first Half-Life Smiley Though these 'second life' type things seem rather oddball to me (apologies to all aficionados on this forum...), I've never heard of the *UK* taxman going after profits within virtual worlds.

The key is to think like the taxman. They're people too! Also, they tend to act like slightly self-righteous accountants. Accountants need to be reasonably intelligent in order to study the necessary learning and pass the exams (and keep up to date). So, switching personas... what would a taxman do? I think he or she would immediately simplify Bitcoin to 'A.N.Other Currency' - OK, where's the bank account? On the Internet, distributed? Right, that's 'offshore bank account' then. Nice and simple, cuts through all the B.S. - and reduces all issues with Bitcoin down to nice off/on-shore FX transactions, which can be accounted for numerically and the tax calculated easily.

I think that if you present the business activity in this fashion, then the entire 'Bitcoin / mass media / buying drugs / suspicion' B.S. will be ignored absolutely by the taxman as they are professionals, by and large. OK, you've spotted a niche, you're FX trading with Bitcoin vs. 'real' currencies. AFAIK, you only account for the income when you convert to GBP and deposit within an onshore bank account.

The big difficulty that *I* can think of is how you convince the taxman that your accounting for *losses* isn't bogus - after all, running your P&L depends on whether each trade is in the money or not. And your profit per trade will depend on prevailing FX rates, which for Bitcoin are less transparent than the trillion-pound FX market. Give the taxman bogus FX rates and you can make your trade history average out at zero profit (and hence zero corp tax - though that won't help you pay yourself any dividends, assuming you're running a limited co). So you really need *some* sort of attribution for historical Bitcoin FX rates, and the MTGox sploit didn't help matters here.

But, in general, the taxman will be fair if you *talk* to him/her. I've run into aggro with my little company before and had to cut a deal with the taxman. It's as easy as being friendly and honest. You can't cut a deal with Customs... but they shouldn't be involved here until I start getting VAT notices with the word 'Bitcoin' in them Smiley

If you *REALLY* want to pay tax on all your trading profits then you'll need an attributed source of FX rates, which I'm sure exists in your accounting system (or Excel... Wink ) - maybe download a chart from bitcoincharts.com, and explain this with your return. If you get audited, be prepared to either brief your accountant / tax adviser *thoroughly* or do the job yourself (risky) and chat with the tax man / lady to explain how your FX rates (and profit / loss figures) are reasonable.

My gut feeling (from getting interested only a few weeks ago) is that daily GBP Bitcoin rates aren't massively liquid, and hence oddly profitable / loss-making trades could easily fit within a standard deviation or so daily... whether you choose to cook the books and reduce your declared profit (and tax) is up to you, but I'd personally take the simple route and not declare any of it.

Once something is declared, if you get a taxman interested then he/she will dig and dig - the day job is boring so anything potentially 'new' will be jumped on. I reckon declaring FX trading profit on Bitcoin is a losing proposition - the taxman will question your rates (and profits) regardless of their honesty and you'll have to show proof of each transaction (actually quite easy with Bitcoin transaction histories!!!!). But it *is* possible. If you're making thousands (or more) a month then it's probably worth declaring... otherwise take a leaf from the small-time silver (and gold) coin traders and don't declare. For example - I may collect coins... but do I account for their value numismatically, or as bullion spot prices (which I cannot buy or sell at), or face value (silly, but why not?). Too many questions means the taxman will simply ask you twice as many...


Sorry for long post, hope it's of some use. FWIW I run a company and do all the accounting and tax returns (company and personal SA) myself, so have well over a decade of experience but am NOT A TAX LAWYER so, as always, caveat emptor (and you didn't pay for this info, unless you've sent me some BTC, mwuahaha)

Cheesy

...so I give in to the rhythm, the click click clack
I'm too wasted to fight back...


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