UK Edition
Revealed: The tax-free Bitcoin loophole that could cost Treasury millions
A tax loophole which reduces Bitcoin investors' gains to zero will be exploited by people filling in their returns for this tax year, potentially creating millions in lost revenue for the Government, experts have warned.
HMRC is expecting to see a surge in the number of taxpayers declaring gains from cryptocurrencies this year after many investors sold their holdings after values soared, leaving them with huge profits.
However the taxman's anticipated windfall could be far less than expected thanks to a loophole which lets taxpayers class their investment in cryptocurrency as "gambling", winnings from which are tax-free.
An HMRC spokesman said: “We don’t normally tax betting and gambling because it is usually not classed as trading income. But there may be circumstances where factors such as the degree of skill and organisation would make the activity more likely to be taxable as trading income. Each case will depend on its own facts.”
Tax experts said HMRC's guidance on the matter was "outdated" and likely to confuse amateur investors who did not have a sophisticated understanding of the tax system.
On Friday the price of Bitcoin was at £8,337, up from £454 in March 2014 which was the last time HMRC issued guidance on the taxation of cryptocurrencies.
Etienne Wong, a barrister specialising in tax, said it was unclear which investors could legitimately be classified as "gamblers", but that earlier investors who did not have large portfolios of similar investments in the technology world were more likely to be able to successfully claim this.
Individuals who are deemed to have traded in cryptocurrencies in a similar way to they would buy and sell investments are required to pay capital gains tax on their profits.
CGT is payable on gains above £11,300 and is charged at 18 per cent for basic-rate income tax payers, and 28 per cent for higher rate taxpayers.
Robert Langston of accountancy firm Saffery Champness, who has advised a number of bitcoin investors, said he recommends clients declaring bitcoin profits to pay capital gains tax.
He said: "It is difficult to see how the profits on mainstream cryptocurrencies [such as Bitcoin] could be seen as gambling profits".
"There may conceivably be some cryptocurrencies in which the markets are random, and therefore the profits could be treated as gambling."
Even if it was deemed a bet, he explained that unlike gamblers who are betting in cash, cryptocurrencies remain a chargeable asset for tax purposes.
Until now, anybody buying and selling bitcoins and other digital currencies have been able to do so anonymously, making it attractive to criminals and tax avoiders.
But in a bid to crackdown on this criminal activity Ministers are launching measures to prevent people using it for money laundering and tax dodging.
The Treasury has disclosed plans to regulate the Bitcoin that will force traders in so-called crypto-currencies to disclose their identities and report suspicious activity.
Bitcoin has a total value of around £145 billion.