Tax Planning in the UK

[botany]

The following includes my interpretation of tax laws in the UK. Do let me know if your view differs.
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The HMRC was one of the earliest government organizations across the world to provide clarity on Bitcoin taxation. Way back in 2014, the HMRC published a document which talks about taxes due in the crypto world. These can be broadly classified into
 - Value Added Tax: No value added tax on purchase / sale of bitcoins for fiat. However, when you purchase goods with Bitcoin, VAT will be payable on the cost of goods. This is no different from purchasing goods for fiat.
 - Income Tax: Income received in bitcoin for services rendered will be charged at the marginal rate of income tax.
 - Capital Gains Tax: If you incur gains from the sale and purchase of bitcoins, then you will be liable to pay capital gains tax.

There is some commentary on whether bitcoin trading should be considered as a highly speculative activity like gambling, which is not taxed. There may not be too many case precedents about whether this is an acceptable strategy and will pass muster from the HMRC, if such an approach is challenged. The safe approach is to consider that your gains on sale of bitcoins are liable to capital gains tax, and calculate and pay them accordingly. Whenever in doubt, I look at the approach of HMRC towards taxing equity. The stock markets may be volatile too, but nobody equates profits from the stock markets to gambling.

The Tax Planning Angle
There are limited avenues to reduce VAT / Income Tax through proper planning. However, capital gains are crystallized and taxes are due only when bitcoins are sold. So through careful planning, it may be possible to pay reduced / no taxes on your gains. Some of the avenues which you can use to reduce tax are

- Annual Capital Gains Allowance (GBP 11,300 in FY2018)
The UK government gives a capital gains allowance of GBP 11,300 to every tax payer. So if you are sitting on a big pile of bitcoins, purchased during the early years (say 2012), and you decide to sell a couple of bitcoins so that your gains are less than GBP 11,300, you will be liable to pay -zero- tax. If you are not want to hold these coins for a lot longer and are not interested in booking profits now, you can still repurchase the coins. When you finally decide to sell these coins, the cost of acquisition will be based on 2018 prices and your tax liability will be lower.

- Gifts to Spouse / Civil Partner
Gifts to spouses / civil partners are not considered taxable. However, when your partner decides to sell the asset, the gain will be calculated based on your acquisition price (not the value of the asset at the time of gifting). So in the previous example, you can gift your partner 2 bitcoins, which he/she can proceed to sell. Your partner will be liable to pay capital gains tax, but if the capital gains is less than GBP 11,300, then no tax is due. So you and your partner can realize gains of GBP 22,600 in a year before any tax becomes payable.

Point to Note: Bed and Breakfasting Rule
There are rules in place to prevent wash-sales in equities. To be on the conservative side, it is best we assume that such rules are applicable to Bitcoin as well. For example, if you had bought 2 bitcoins for GBP 100 in 2012 and you sell them for GBP 10,100 on 1-January-2018, your total capital gain is GBP 10,000 and you are liable to pay no tax as the gain is below your annual allowance. However, if you repurchase these coins within the next 30 days (say on 15-Jan-2018), then your capital gains liability will have to be calculated based on the bed-and-breakfasting rule. If the purchase cost of 2 bitcoins on 15-Jan-2018 is GBP 10,100, then your capital gains will be considered as zero. You would effectively have not used your annual capital gains allowance. So it is best to wait for a period of 30 days before repurchasing the coins. However, you then run the risk that Bitcoin might enter a bull rally in those 30 days and you would miss out on the price rally.

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[botany]

Reserved for discussion on the Remittance Basis of Taxation.

[marielbeckham]

Oh, it was really absorbing to learn all these details. The point of view is depicted briefly but everything is very clear at the same time.

[gentlemand]

This is the best place to keep abreast of discussion on this subject - https://www.reddit.com/r/BitcoinUK/

There are quite a few accountant types on there now accepting clients. It appears you're at the mercy of the HMRC's interpretation on a case by case basis for certain details.

For instance for crypto to crypto trades there are plenty of people who are classing them as a disposal and therefore taxable, others are being vehement about only paying at the moment of GBP conversion.

They may have been one of the first, but they're still being a lot fuzzier than they need to be.

[Brambam]

Interesting post.
The Tax Planning Angle
- Gifts to Spouse / Civil Partner
So if my wife gave me three bitcoins, as a gift last summer, and she bought them for let's say GBP 4332. If I want to sell them now there will be no taxes, because my Bitcoins with the current price of around GBP 23835 in total will be calculated as GBP 4332 and not GBP 23835. Gains are not included in taxation. Am I I right?
In that case, I could gift my low value coins to my wife, to amount of GBP 11,300 and she can do the same. And after holding it for two years just sell it and avoid taxes no matter if the value of those coins exceeds let's say GBP 10.000.000 in total.
Of course, there is a risk of holding it, but with this upward trend in crypto, this method is very good for avoiding taxation, in case of holding the coins.

[Tigorss]

Oh, it was really absorbing to learn all these details. The point of view is depicted briefly but everything is very clear at the same time.

Under the EU plan, online platforms where bitcoin trading will be required to conduct due diligence on customers and report suspicious transactions. The British government is negotiating amendments to anti-money laundering directives to ensure the activities of the company are overseen by national authorities.

[botany]

This is the best place to keep abreast of discussion on this subject - https://www.reddit.com/r/BitcoinUK/

There are quite a few accountant types on there now accepting clients. It appears you're at the mercy of the HMRC's interpretation on a case by case basis for certain details.

For instance for crypto to crypto trades there are plenty of people who are classing them as a disposal and therefore taxable, others are being vehement about only paying at the moment of GBP conversion.

They may have been one of the first, but they're still being a lot fuzzier than they need to be.

Thanks! I was not aware of the Reddit thread.
I will go with those who classify crypto to crypto trades as disposal. We do not have the equivalent of a US style 1031 exemption, which will help us postpone capital gains. Even for people who trade houses, capital gains tax is applicable (unless it is your primary residence). It is about time the HMRC comes up with updated guidance regarding cryptos.