What should I do with this £200k ?

[mjbdreamer]

So, my 14 year old son has been playing online minecraft games with a young Swedish lad, they are the same age to the day and have been good friends since they were 10. I spoke to his parents once years ago to check that it was a like-minded boy and not some 'pretender'. All is good. Lovely lad, lovely parents.

So these boys are doing things like creating graphics for the minecraft people and helping out, mostly for fun and often getting paid a dollar or two for this.

When I enquired how things were I found out my son had over $1000 in an account and his friend had also made some money. Interestingly the friend had also been paid in bitcoins once, when they had little value - now they are £4200 each approx. He was paid 250 of the things.

Then on Saturday, the Swedish friend casually gave my son 50 bitcoins so now my son has his $1000 in one money account and £212,000 in his bitcoin wallet.

I am led to believe the other lad has wealthy parents so doesn't think or care too much about money. The parents do not know about his bitcoin stash which is now only a mere £840,000.

I see the options as:
- look the other way
- ask my son to send the bitcoins back
- speak to the parents and ask their thoughts on what the boys are up to but that would invade on the empire the boys have created
- tell my son he is taking us on our first family holiday in a few years and might like to clear the mortgage.
- walk to the pub shaking my head and muttering

What would you do?

[chas49]

Moderator Message:
I'm not sure this is truly a DAK but I can't immediately think of a better board to put it in. Please try and keep the discussion broadly to the questions the OP has posed (chas49)

(mod hat off ) I can't help with the moral dilemma at the moment, but you might want to consider if there are any tax implications for your son. Is this a gift or income? Foreign earnings? Perhaps you might want to do a post over in the Taxes board (viewforum.php?f=49) to attract responses on that specific element?

[bungeejumper]

Documentation, documentation, documentation. Yes, I appreciate that there won't be much from the bitcoin system, but any emails, private mails, etc, that will substantiate your son's claim that he was given the money freely, voluntarily and irrevocably. Just in case anybody changes their mind.

If I were HMRC, I'd also want to know where this gift came from. That seems like an obvious thing to say, but I presume you've got it covered?

BJ

[mjbdreamer]

Thanks BJ. There is nothing other than skype voice chat on this so no documentation at all.
I put the question to the Fools on the tax board too. I hadn't even thought about tax until Chas mentioned it.

[gryffron]

Well done!

But he certainly shouldn't leave it all in bitcoins. Cos whilst they have climbed inexorably, they are still an investment bubble with no real underlying value, which could disappear tomorrow. Personally, I'd convert a fair whack (75% say) to something more solid like cash, bonds or shares (tracker funds)

THEN worry about where it came from and tax. If the lads have done work to earn this money then I think it should be taxable, rather than a gift Note that age is largely irrelevant to the taxman. With a few exceptions, Children have all the same tax allowances and liabilities as adults.

Gryff

[UncleEbenezer]

they are still an investment bubble with no real underlying value,

A bit like gold, then.

OK, gold has value as a metal, but not so as to reflect its price. Some investment bubbles can stay inflated for thousands of years.

[NomoneyNohoney]

I'd say, not at all like gold.
Gold is a tangible asset - you can touch it, and it exists. Bitcoins are a hypothetical currency that only exist because people say they do. In a way, they're like a promise, that can easily be broken.

[GoSeigen]

Well done!

But he certainly shouldn't leave it all in bitcoins. Cos whilst they have climbed inexorably, they are still an investment bubble with no real underlying value, which could disappear tomorrow. Personally, I'd convert a fair whack (75% say) to something more solid like cash, bonds or shares (tracker funds)

THEN worry about where it came from and tax. If the lads have done work to earn this money then I think it should be taxable, rather than a gift Note that age is largely irrelevant to the taxman. With a few exceptions, Children have all the same tax allowances and liabilities as adults.

Gryff

I don't agree with the sequence proposed here. At the moment it is unclear whether the bitcoins received are irrevocably your sons or whether at some point there could be a demand to return them. If you were placed in the unfortunate position of having to pay them back, it would be a nightmare to be holding pounds and find that bitcoin value has trebled!

Therefore, so long as any potential liability remains, you should not convert them from BTC to anything else.

IMO as a matter of highest priority you should:
1. Conduct a thorough investigation of your son's understanding of how and why he came by these bitcoins.
2. Contact the other child's parents and request they consider doing likewise.
3. Given the high value and and your risk of tax liability etc, negotiate with the parents a written confirmation of the status of the received bitcoin. You might seek legal advice on what to include to make such confirmation or agreement watertight and irrevocable.
4. The above should be completed ASAP, following which Gryff's advice is sound, i.e. to diversify the holding to a great extent. I would argue that a bullish allocation to the BTC might be 5-10% max of your assets, or 5-10% of your son's assets if you are to treat him as having sole responsibility for them (outside of your own legal duties). I'd be minded to insist on the above allocation limits, having discussed thoroughly the reasoning with your son, of course.
5. Then deal with the tax aspects (though you should of course have the tax repercussions in mind during the above process).


Good luck, your son is clearly a self-motivated individual who has been rewarded for his work, but also has massively benefited from some extraordinarily good luck. He should be equally congratulated for his resoursefulness and guided not to dismiss the luck element and be a bit modest about the prospects of repeating the trick!

Definitely do NOT hide it from the tax man!

GS

[gryffron]

Fair point UncleE. I was just thinking through the very worst possible case. He'd have to be pretty unlucky but what if:

HMRC decide this is income and they want their slice of tax £75k (ish).
Bitcoin bubble bursts and lad is left with a massive tax liability and nothing to pay it with. Capital losses are NOT offsetable against income tax.

This can easily be mitigated by cashing in half the bitcoins right now.

Diversifying investments is important for everyone. Bitcoins, gold, anything. And especially someone potentially facing a sizeable short term liability. Just because he has won on bitcoins so far doesn't mean he should continue to run the bet. True winners know when to cash in.

Morally, I'd want him to keep the money. He's earned it. He deserves it. Not like he has robbed the friend. They were in it together and he deserves a share. Just make sure he understands it will pay for his entire future if managed properly. He's obviously a smart lad. Talk through the options and let him make the decisions.

Gryff

[gryffron]

Just read GS's reply. Fair point. And I suppose more likely than my option. So yes, sort out ownership first.

Gryff

[PinkDalek]

See also the Taxes thread:

viewtopic.php?f=49&t=7894

[Urbandreamer]

Of course ownership NEEDS to be clarified. Also how much of a "gift" is it? If in recognition of services rendered then arguably it's income!

The latter is a tax issue best discussed on the other thread.

I would dispute the concept that Bitcoins (the value of which is only what people will pay) is less real than the price ascribed to a metal, easily functionally replaced by other metals. Bitcoin has a limited total quantitiy. Gold is rare, but the total quantity is NOT known and in theory significant quantities could be discovered in the arctic or other remote locations.

Let us be honest, we ALL use fiet currencies. The value of a £ changes agianst a $ and against one ounce of Au or Ag or even Bitcoin.

However I too would argue in favour of moving funds out of Bitcoin, given that your son's wealth is 99.5% bitcoin and 0.5% $ denominated. Personally, were I your son, I'd do so slowly. But then I would rather lose money than pay tax! Your son may not feel the same.

OK, so at the end of the re-distribution what would I recomend. Keep 15 bitcoin, put 15 in a Swiss bank if you can or at least in their currency. The remaining 20 bit coin I would spend on shares, either a index tracker, active fund or shares I picked myself. I'd change things if buying a house to 10% bitcoin 10% SF, 10% shares and 20% house, because we all need somewhere to live.

NOTE, this is theory. I don't own any bitcoin, SF or have a Swiss bank account.

[Clitheroekid]

If the lads have done work to earn this money then I think it should be taxable, rather than a gift

From what the OP has said in his post I don't agree.

Leaving aside the question of whether a 14 year old could have entered into a valid contract in this way the son has neither an employment contract nor a contract for services, so I can't see that he has a legal right to any income.

It seems that they have been doing the work voluntarily - as a hobby - and that any payment received has been in the nature of a `thank you' rather than specific remuneration for the work.

But even if he did have some form of contractual agreement with the Minecraft developers the transfer of the Bitcoins was made by his friend, not the developers, and it is quite clear that he had no contractual relationship with his friend.

Consequently, it seems quite clear to me that the transfer was by way of a gift, and not, therefore, subject to income tax.

What would concern me far more would be whether the friend actually appreciated the value of the gift. Whilst one might assume that computer literate 14 year olds would know about such matters it's quite possible that they are brilliant at coding but have next to no financial knowledge at all.

Because the friend received 250 Bitcoins for a presumably modest amount of work he may have mentally assigned a value to the Bitcoins as being similar to the cash payments he'd been receiving for similar work, i.e. maybe $1 per bitcoin, and that he (and his parents) would be astonished to discover its true value.

This might then raise the question of whether the gift was actually valid at all. If the friend didn't know the true value then it would be legitimate to ask whether he actually had capacity to make it in the first place - one of the tests of capacity is to understand the value of property being given away. After all, a child is presumed to lack capacity, which is why, with a few exceptions, they can't enter into a valid contract.

In English law a gift by a minor is `voidable'. This means that it is presumed to be void in law, but once the minor becomes an adult he can `affirm' the gift, which then retrospectively validates it. But he can also demand its return if he decides that he made a mistake. This would mean that the gift was at risk of being reclaimed by the friend (or more likely his parents).

However, presumably it would be Swedish law that would apply in this case, where the rules may be different.

This produces a serious moral and legal dilemma. If you do tell the parents they may take the view that the gift was a mistake, and demand it back. This would risk depriving your son of a very substantial sum of money that would set him up in life.

However, if you don't, and if Swedish law is similar to ours, this would leave open the possibility that the gift could be reclaimed by the friend (and/or his parents) at a later stage anyway.

Beware of Swedes bearing gifts!

[UncleEbenezer]

Beware of Swedes bearing gifts!

Heh.

Last year I repatriated a very much more modest sum from Sweden. There was quite a bit of paperwork, including my NI number and a declaration for the benefit of both countries' tax authorities.

But that was oldfashioned currency: an inheritance from a generation that never heard of bitcoin. No idea whether any of the powers-that-be have ever considered whether and how the process I was following should apply to bitcoin.

[gryffron]

But that was oldfashioned currency: an inheritance from a generation that never heard of bitcoin. No idea whether any of the powers-that-be have ever considered whether and how the process I was following should apply to bitcoin.

Pretty much the whole point of bitcoin (originally) is that it is a peer-to-peer transfer that cannot be controlled by governments, just like cash. That was before it became an inflated investment bubble. Of course, just like cash, lack of government "control" does not free you from the legal obligation to report it.

Gryff

[scrumpyjack]

But that was oldfashioned currency: an inheritance from a generation that never heard of bitcoin. No idea whether any of the powers-that-be have ever considered whether and how the process I was following should apply to bitcoin.

Pretty much the whole point of bitcoin (originally) is that it is a peer-to-peer transfer that cannot be controlled by governments, just like cash. That was before it became an inflated investment bubble. Of course, just like cash, lack of government "control" does not free you from the legal obligation to report it.

Gryff

There is no 'legal obligation' to report a gift.

But if the lad received the bitcoins as a reward for the computer work he did, he would need to declare the value (as at the time the bitcoins were received) as income in the relevant tax year. Any increase in the value of the bitcoins since then would need to be declared as a capital gain for the tax year in which they were sold (if the gain exceeded the CGT allowance )

[staffordian]

...But if the lad received the bitcoins as a reward for the computer work he did, he would need to declare the value (as at the time the bitcoins were received) as income in the relevant tax year. Any increase in the value of the bitcoins since then would need to be declared as a capital gain for the tax year in which they were sold (if the gain exceeded the CGT allowance )

I think CK has given a pretty definitive reply above suggesting it is a gift.

[GoSeigen]

I think CK has given a pretty definitive reply above suggesting it is a gift.

CK's post was excellent as usual but he only knows what the OP has posted here. The OP should still satisfy himself that it's a gift, and not payment for work owed from way back.

GS

[Leither]

As far as I know, Minecraft is developed by a company in Dundee. Why would they pay in Bitcoins? Might be worth contacting them.

Regards,

Leither.

[melonfool]

I am surprised Minecraft would pay at all, loads of kids seem to 'help' with it, my ex step son did (though he's a lazy so and so, I doubt he actually finished what he was supposed to do).

If I were the OP I would be looking VERY closely at what my 14yo was doing online to earn that sort of money, whether directly or as a 'gift'. And I would be very concerned about money laundering. I would have no qualms at all about 'intruding on their empire' - 14 years olds do not have a right to privacy over these sorts of things, parents need to be sure they know what they are up to.

If the bitcoins are converting to sterling and banked, you can be sure the bank will be digging around with their money laundering questions. And how are you going to answer them?

Income tax is the very least of your worries if you ask me!

Mel