Bitcoin investors who cashed out before the recent value slide may be feeling relieved, but have they now entered a compliance conundrum? Apart from the regulatory restrictions imposed by certain financial institutions refusing to accept funds derived from Bitcoin investments, or charging high transfer fees to do so, as detailed in the FT's article, there is also considerable uncertainty about the way profits from Bitcoin and other cryptocurrencies should be taxed.
HMRC's last formal guidance on this was published back in 2014 when the volume and value of trades was much more limited. We should expect revised guidance in due course, but for the moment the position seems to be that established cryptocurrencies should be treated in the same way as any other types of capital asset (with capital gains or losses calculated by reference to the sterling value of the asset on acquisition as compared to the sterling value on disposal). "Disposal" would include spending or exchanging the cryptocurrency and the practicalities of this calculation can be complex where a holding has involved multiple trades. A further complication is that returns for many investors will be in the nature of trading income rather than capital gains, which is governed by a separate set of tax rules.
Another open question is the location of any gain for tax purposes. Although the analysis is far from clear, there are likely to be many circumstances when the gain will be considered "offshore" for a UK resident investor. The relevance of this is that instances of non-compliance for "offshore" liabilities are a more serious matter.
Any offshore non-compliance not disclosed to HMRC by 30 September 2018 will come within the new "failure to correct" penalty (with a minimum penalty of 100% of the tax involved) with HMRC granted extended powers of investigation. Cryptocurrency investors should therefore be taking steps to ensure that they understand the liabilities that accompany their financial gains.
British investors who want to cash out of cryptocurrencies into pounds face the hurdles of having to make international money transfers, being charged high fees and drawing the suspicion of banks.