There are more than 1,500 so-called ‘cryptocurrencies’, such as Bitcoin, in circulation now, and an increasing number of people are taking them as benefits.
The risks are clear. A virtual currency is not backed by any state treasury, is hard to turn into ‘real money’, and exists only as a computer algorithm.
But, aside from the valuation risks, what anyone receiving cryptocurrencies must remember is that these are still taxable.
There may be a temptation to not declare them to tax authorities, because there is no clear policy on tax. Resist it. Her Majesty’s Revenue and Customs (HMRC) has made it clear that existing legislation is enough to tax cryptocurrencies.
In the meantime, despite the absence of specific legislation, any transfer of Bitcoins into a traditional currency is subject to capital gains tax or income tax, depending on individual circumstances.
My advice to those who receive a substantial amount of Bitcoins each month is simple. Declare them and let HMRC assess the details. Transparency is the key.
We have also recommended to anyone being paid in cryptos, which is hard in itself because values fluctuate daily, that they delay filing tax returns until the autumn. This will give more time for HMRC’s promised guidance to emerge.
If none arrives by then, there are steps to take with a tax return filing to reduce the future risk of a future penalty. These essentially concern a full declaration.
There are issues for employers, too, if they hand out cryptos. When the guidance finally arrives, it may also show whether there is any advantage to paying in virtual money in terms of national insurance contributions. There are none currently.
The best advice for everyone, in the absence of official guidance, is to keep it clear and simple and completely transparent.
Geraint Jones is a partner at tax advisory firm BKL