British digital currency speculators are in a limbo over if they should pay tax on the money they make online.
Thousands of investors made significant profits trading Bitcoin, ethereum, and other cryptocurrencies last year.
Bitcoin started 2017 worth $900 and the value shot up to $20,000 in December before a turbulent downturn has seen the price tumble to around $6,000.
Speculators lucky enough to sell at the right time are sitting on a big profit.
Do you pay tax on cryptocurrency profits?
Yes. Digital currency profits are taxed as capital gains, so tax is due on any gap between the buying and selling price.
Tax is also due if the currency was swapped or gifted to someone else.
Can traders claim any tax relief?
Yes. Every taxpayer has a capital gains tax annual exempt amount. This year, the exempt amount is £11,300.
Taxpayers are allowed gains up to this amount before they pay capital gains tax.
Save tax with this loophole
If the digital currency trader is married, he or she can gift the investment to their spouse to take advantage of their £11,300 annual exempt amount.
A loophole says transfers between spouses are exempt from tax.
For example, a trader who is a 40% higher rate taxpayer has a £25,000 digital currency gain for the year.
As a single owner, the tax due is £25,000 less £11,300, leaving £13,700. As a top rate taxpayer, capital gains tax is applied at 20%, making the tax due £2,740.
If half the gain had been split between our higher rate taxpayer and their 20% tax paying spouse, each would have a taxable gain of £12,500 less £11,300, leaving a taxable gain of £1,200.
At 40%, the tax would be £240 (£1,200 x 20%) and at 20%, £120 (£1,200 x 10%). Total tax would be £360, a saving of £2,380 for our single owner taxpayer.
What tax rules apply to Bitcoin traders?
Gains are taxed under the capital gains act because digital currencies do not have a legal classification in the UK as money. Profits from currency trading are tax exempt.
Income tax might apply to someone who can show digital currency trading was their main job.
This would involve huge numbers of transactions, placing trades for others and running the activity as a business.