Speculating or selling items - the taxation difference.

[Jet Cash]

I'm in England, and I'm not an accountant or a tax expert, so this post is purely personal speculation.

There is some serious speculation about the price of Bitcoin in a year's time, and some say it will be over £250,000. This may or may not be true, but is does seem probable that it will be substantially higher. This has led me to consider the possible taxation of any gains. Buying coins as an investment, and holding them in the expectation of future profits, would seem to create a trading or capital gain liability. However, there are other way of acquiring Bitcoin.

I have accepted Bitcoin in exchange for domain names, and it is these transactions that I want to consider. If I purchase a domain name for $10, and I sell it for $210, then I have made a profit of $200 less the cost of acquisition. I understand that the tax liability occurs at the time of disposal, and the profit is calculated by converting the dollars into Sterling at that time. If I hold the dollars and convert them at a later date, then that doesn't seem to create a further profit or loss. Now it starts to get interesting if I accept Bitcoin for the sale. One can argue that Bitcoin is effectively a currency, and thus the same rules should apply. Let take an example - if I purchase a name for £100, and I sell it for 1 Bitcoin, then I have made a profit of £4,000 ( assuming the current value of Bitcoin is £4,100) less acquisition costs. If I keep the Bitcoin for a year, and the price rises to £104,000, then I believe that the "extra" £100,000 is not liable to tax. I'd be interested to hear any other views on this.

If you are a HODLer, and you increase your Bitcoin wallet by selling non-crypto assets, then it would seem wise to keep accounting records of your transactions to help in any future negotiations with the tax authorities.

[1713981923]

1713981923

[1713981923]

1713981923

[tmfp]

If I keep the Bitcoin for a year, and the price rises to £104,000, then I believe that the "extra" £100,000 is not liable to tax.

That would be nice, but highly unlikely.
IANAA, but HMRC would probably take the view that the BTC became a taxable asset when you received it, at a booked value of £4100.
They would probably say that you bought the domain name for £100 and sold it/exchanged it for an asset worth £4100 as transaction #1 (and tax you on that £4k profit), then used that net £4k to effectively become the owner of second asset i.e. the BTC, and then tax you on the £100k profit you make on it as transaction #2.
I take it you have tried to make sense of this?

[Jet Cash]

Well if that were the case, then you could get roll over relief, but if you claim that, then you would be taxed on the receipts for the Bitcoin. My feeling is that it depends on their decision as to your Bitcoin activities. If they think of you are a currency dealer, then you may have to pay tax on the Bitcoin price rise element. If they consider Bitcoin to be a currency, then I suspect you may not have to pay the gain. Even more interesting is the use of gold Britannias. They are legal tender, and as such have a value of £100. Because they are gold, then it will cost over £1,000 to buy one from the royal mint. Because they are legal tender, they are exempt from gains tax and VAT. Thus selling the domain for 4 Britannias would give a sale price of £400, and only £300 of that would be taxable. Obviously this will only work in the UK.

One other aside of this is that you may have to purchase tangible goods with Bitcoin to avoid becoming a currency trader. I bet there aren't many tax accountants that can venture an opinion given the changing status of cryptos.

[Foxpup]

If I keep the Bitcoin for a year, and the price rises to £104,000, then I believe that the "extra" £100,000 is not liable to tax.

Not until you sell or otherwise dispose of it, no.

[tmfp]

My feeling is that it depends on their decision as to your Bitcoin activities. If they think of you are a currency dealer, then you may have to pay tax on the Bitcoin price rise element. If they consider Bitcoin to be a currency, then I suspect you may not have to pay the gain.

I think you should start with the assumption that any activity you carry out which creates profit will be taxable, the question is whether it will be classified as income or capital gain. That will depend on your individual circumstances and the "badges of trade" criteria.
Whether they consider Bitcoin a currency or not a currency is a red herring; holding any non sterling currency is holding an asset and appreciation in its sterling value is potentially taxable, like that of any other asset. 

[Jet Cash]

I don't believe it is as simple as that. If I buy gold Britannias to speculate on the price of gold, then any gain is tax exempt because they are legal tender. I've had discussions in the past with regard to selling domain names for US dollars, and the tax situation seems to be that the point of sale is the transfer of the domain, and not the exchange of the dollars. If Bitcoin is recognised as a currency, then the exchange may not be taxable. This avoids the IR having to allow for currency losses. It's the same idea as any profit you make on selling your car is not taxable, unless you are deemed to be a motor trader. The revenue does this because most people make a loss on their cars. I wonder if any precedents were created as a result of people not being able to claim tax relief after the great price crash.

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I found this government document.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/192091/foreign_currency_bank_accounts.pdf

It seems that if the account is used for personal expenditure, then gains are not subject to tax. This avoids the overhead of having to file returns for every transaction.

[styca]

I'm in England

it would seem wise to keep accounting records of your transactions to help in any future negotiations with the tax authorities.

I'm in England, too, and I have paid tax on crypto gains. This is more about alt trading, but worth posting as still relevant to the wider tax discussion in the UK.

I won't post the accountant I used as that would be advertising, but the position was that crypto-to-crypto trades are considered taxable events, as well as crypto-to-fiat. All of your entry and exits points have to be converted into what the fiat equivalent was at the time, plus there are additional arcane accountancy rules such as same-day, bed-and-breakfasting, pooling.
I appreciate the legislation is vague at best and open to interpretation, but I paid my crypto-to-crypto trades as capital gains. https://www.gov.uk/capital-gains-tax

It was an absolute pain as I had done a lot of trading with alts that year, and in the end I downloaded my order history from each exchange and outsourced the calculation to the accountant instead of trying to work through it myself or use one of the online services.

Nowadays I don't trade so much...