Tax on Cryptocurrency
According to HMRC, cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
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transferred
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stored
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traded electronically
While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.
HMRC have identified the main types of cryptoassets:
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Exchange tokens (like bitcoins). Exchange tokens are intended to be used as a means of payment and are also becoming increasingly popular as an investment due to potential increases in value. The most well-known token, bitcoin, is an example of an exchange token.
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Utility tokens. Utility tokens provide the holder with access to particular goods or services on a platform, usually using DLT. A business or group of businesses will normally issue the tokens and commit to accepting the tokens as payment for the particular goods or services in question. In addition, utility tokens may be traded on exchanges or in peer-to-peer transactions in same way as exchange tokens.
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Security tokens. Security tokens provide the holder of a security token particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
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Stablecoins. The premise is that these tokens minimise volatility as they may be pegged to something that is considered to have a stable value such as a fiat currency (government-backed, for example US dollars) or precious metals such as gold.
The tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.
HMRC does not consider cryptoassets to be currency or money.
On its own, owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activities.
Tax treatment of Cryptoassets for individuals
In the majority of cases, cryptoassets are held as investments. Profits realised on sales will be subject to capital gains tax and losses will be available to offset against other capital gains.
In exceptional cases, an individual could be treated as carrying on a financial trade in cryptoassets.
Capital Gains Tax (CGT)
In most cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make purchases.
Individuals not treated as trading will be subject to CGT on the profits, they realise on disposing cryptocurrencies. If any amount has been subject to income tax when obtained (for example, as a result of mining, or as employment income) then the amount previously taxed will form the base cost of the asset for these purposes.
Capital gains on cryptocurrencies of the same type need to be calculated by following ‘pooling’ rules with normal matching rules applying. Different pools will be required for each cryptocurrency. It is also important to realise that a disposal of cryptocurrency takes place not only when they are exchanged for cash, but also if they are used to make purchases of other cryptocurrencies.
Income tax
An individual will be subject to income tax on the profits made when disposing of cryptoassets, if they are classed as ‘trading’.
The tests to determine whether or not an individual is deemed to be ‘trading’ in an asset are complex and are based on the interaction of a number of factors, including the source of financing, the frequency of transactions, the method of acquisition and the interval of time between the purchase and sale of the asset. As with trading in shares, the threshold to be considered trading is relatively high - the operation must show substantial frequency in transactions, organisation and sophistication.
This will ultimately be a question of fact and will depend on the specific circumstances of each case. In practice, it is very unlikely that HMRC will accept that an individual is trading in cryptoassets.
Cryptocurrencies received through either mining or staking (both ways of receiving new cryptocurrency by verifying transactions on the blockchain) will be taxed as income either as a trade or miscellaneous income depending on the circumstances.
There is a common misconception that cryptocurrencies are taxed as gambling winnings, which would mean that no profit would be taxable and no relief available for losses. This position was based on historic HMRC guidance, but HMRC have now updated their guidance to confirm that they do not consider transactions in cryptocurrencies to be gambling.
Foreign currency
HMRC expect records, calculations and reporting to all be undertaken in GBP. Therefore, like other assets, it is possible for capital gains to arise when exchange rates move, even if the value of the asset expressed in a non-UK currency remains the same. Where value may be recorded in different cryptocurrencies (usually Bitcoin) a double conversion will be required (Bitcoin value to USD, USD to GBP). This can add further complexity to the calculations.
Employment tax
It has become more common, particularly for companies operating within the crypto-space, for employees to be paid in cryptocurrencies as opposed to cash. If the cryptocurrency is a readily convertible asset (broadly relatively easily changed into cash) it will be subject to PAYE – otherwise it will be taxable as a benefit in kind. This will also affect which type of National Insurance contributions are payable.
Inheritance Tax
Cryptoassets will be property for the purposes of Inheritance Tax. The location (also referred to as situs) of assets may need to be determined for non-UK domiciled taxpayers.
Situs
The situs of a cryptocurrencies can be very important in determining the tax position for a non-domiciled individual, who may be taxable on the remittance basis or attempting to manage their exposure to UK inheritance tax. The HMRC manuals currently state that the taxation of cryptocurrencies will follow the residency of the owner, such that cryptocurrencies held by a UK tax resident individual would be UK situs.
Record-keeping
Cryptoasset exchanges may only keep records of transactions for short periods. The onus is on the taxpayer to keep their own records for each transaction in case of HMRC review or enquiry.
Cryptoassets for businesses
A business is liable to pay tax on activities they carry out which involve exchange tokens, such as:
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Buying and selling exchange tokens.
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Exchanging tokens for other assets, including other types of cryptoassets.
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Mining.
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Providing goods or services in return for exchange tokens.
Trading income
As for individuals, the question whether a trade is being carried on is key and the Badges of Trade apply. Relevant factors include:
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Degree and frequency of activity.
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Level of organisation.
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Intention, including risk and commerciality.
If a business’s activities amount to a trade, the receipts and expenses form part of the calculation of trading profit for the corporation tax (CT) purposes.
Intangible assets
Companies that account for exchange tokens as intangible assets may be taxed under the CT rules for intangible fixed assets if the token is both:
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An ‘intangible asset’ for accounting purposes.
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An ‘intangible fixed asset’ that has been created or acquired by a company for use on a continuing basis.
Taxed as investments (chargeable gains)
If a company or corporate member of a partnership holds exchange tokens as an investment, they must pay CT on any gains realised on disposal.
When company realises a capital loss on the disposal of exchange tokens, this can be used to reduce an overall gain on total capital disposals. There are special rules for losses when disposing of exchange tokens to a ‘connected person’.
Stamp duty, Stamp Duty Reserve Tax (SDRT) and Stamp Duty Land Tax (SDLT)
HMRC will consider on a case-by-case basis whether a transfer of exchange tokens meets the requirements for stamp duty or stamp duty reserve tax to apply.
HMRC considers that Stamp Duty Reserve Tax will apply if tokens are given as consideration for purchases of ‘chargeable securities’. The same applies for Stamp Duty Land Tax (SDLT) if tokens are given as consideration for a purchase of land.
VAT
According to HMRC, VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens. Exchange tokens received by miners for their mining activities will generally be outside the scope of VAT. When exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself.
Services we offer
We are pleased to be able to offer the following taxation-based services:
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A General tax consultation and/or specific tax advice;
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Tax planning for your general situation or for a specific transaction;
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Registration for National Insurance and Unique Tax Reference numbers;
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Preparation and submission of annual self-assessment returns;
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Preparation and submission of return for overseas landlords;
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Formation of UK and offshore companies in respect to an acquisition of the commercial property and administrative and accounting services for corporate entities.
All taxation services are arranged on a fixed fee basis with the fee to be charged agreed in advance of any work being undertaken.
For all questions regarding your business in the UK and tax planning, please contact our Business Consultancy team at Law Firm Limited on +44 (0)20 7907 1460 or via email