The United Kingdom government could lose millions in revenue due to a loophole that curtails crypto gains to zero, say financial experts.
Crypto Gains: Investment or Gambling Money
Every country has its own laws for every sector of society. However, cryptocurrency has become a novel, yet major issue for global governments due to its convenience for tax evasion and money laundering. Her Majesty’s Revenue and Customs (HMRC), a department responsible for the collection of taxes in the UK, surmises that the number of taxpayers would increase due to the snowballing effect of the cryptocurrency market.
However, the expectation could go down the drain, attributing to a loophole which allows crypto investors to categorize cryptocurrency investment as “gambling.” If individuals declare their profits as “gambling winnings,” they would not incur any taxes at all as per UK law. One HMRC spokesperson told The Telegraph:
“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 organization would make the activity more likely to be taxable as trading income. Each case will depend on its own facts.”
Maintaining Clarity in Crypto Taxation
A barrister specializing in tax, Etienne Wong, pointed that current guidance confuses virtual currency investors, as it is uncertain which investors could be classed as gamblers and which would fall under skilled trader (taxable investor). The HMRC’s guidance was last updated in 2014 when the price of bitcoin flirted around $500. At press time, bitcoin price is $10,880.
Therefore it is more likely that early investors could claim themselves as gamblers. If, however, trading cryptocurrencies is judged as an investment, then investors would have to bleed out capital gains tax on profits. The basic tax rate is 18 percent while the high taxpayer rate is 28 percent.
Regulation is on the Way
Robert Langston, an accountant at Saffery Champness, recommends crypto investors reveal themselves as traders:
“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.”
A number of cryptocurrencies have recently been a preferred channel for criminals and tax evaders, primarily due to their anonymity feature. However, government bodies are planning methods to close channels that allow the crypto market to be used as a tax haven.The Treasury has indicated its plan to build a regulatory framework surrounding digital money where investors will have to reveal their identities.
France and Germany have already proposed discussing the regulatory issue at the upcoming G20 summit in Argentina. In that regard, the British government also wants to restrict the use of cryptocurrencies for tax evasion and money laundering. In the past, the British Treasury said, “There is little current evidence of them being used to launder money, though this risk is expected to grow.”
Should crypto gains be considered as gambling winnings? Let us know your thoughts in comments section.