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Cryptoassets and the taxman

Cryptoassets are becoming more and more accepted both as an investment class and a as usable currency. Despite volatility in the prices of these assets, they continue to grow in popularity. Of course, when traders, investors or sellers make a profit or a gain, HMRC becomes an interested party. And as HMRC is increasingly able to access data from crypto exchanges, it’s important to be sure that activity is fully compliant and reported where appropriate. Here we take a look at cryptoassets and their treatment by the taxman.

What are cyrptoassets?

Cryptoassets – it’s a broad term, encompassing cryptocurrency and tokens. HMRC defines cryptoassets as cryptographically secured digital representations of value or contractual rights that can be transferred, stored, traded electronically and use some form of distributed ledger technology (DLT).

HMRC guidance recognises four main types of cryptoassets: exchange tokens (which include cryptocurrency, like Bitcoin), utility tokens, security tokens and stablecoins. Exchange tokens are the main focus of its guidance.

The view from HMRC

HMRC aims to cut through to the underlying transaction, rather than getting hung up on crypto terminology. And it reserves its right to amend its guidance as cryptoassets themselves evolve.

It’s important to be clear that there are no bespoke rules for cryptoassets: the existing tax provisions flex to accommodate them.

In practice, this means that depending on the circumstances, the sale or purchase of cryptoassets could bring any of a number of taxes into play. For individuals, this could include capital gains tax (CGT), income tax and national insurance contributions (NICs). For businesses carrying out activities involving exchange tokens, it could mean corporation tax, corporation tax on chargeable gains, payroll taxes and VAT.

Businesses may increasingly need to consider the tax position where they receive occasional payment in cryptoassets in the course of an existing, non-cryptoasset trade: the glamping site owner who accepts a one-off payment in bitcoin, for example. If a business accepts exchange tokens as payment from customers or uses them to pay suppliers, the tokens should be accounted for within the taxable trading profits.

HMRC’s considerations

HMRC does not consider cryptoassets to be money or currency. This means, for example, the corporation tax foreign currency rules don’t apply. HMRC’s view is that cryptoassets don’t create a loan relationship for corporation tax purposes.

HMRC does not consider buying and selling cryptoassets to be gambling. This has implications for how proceeds are treated. With gambling winnings, profits are not taxable, and losses are not relieved. This is not the case with cryptoassets.

Investments: CGT

According to HMRC, most individuals hold cryptoassets as a personal investment, with a view to capital growth. This means there is the normal CGT regime to consider, with its annual exemption (currently £12,300) and rules on taxation of gains above this threshold.

With many crypto investors taking their first steps in the world of CGT and self assessment, it’s important to be alert to the possibility that there’s a liability to CGT any time assets are disposed of. Details should always be recorded and may need to be reported to HMRC in due course.

Trading in cryptoassets

If purchases and sales of cryptoassets are considered to amount to a financial trade, profits or losses come under income tax rules, with income tax and NICs potentially due. But to constitute trading, HMRC expects considerable frequency, organisation and sophistication in the activity, and treatment as a trade will be the exception rather than the rule.

VAT

Where goods or services are sold for exchange tokens by a VAT registered business, VAT is due in the normal way. The value of the supply on which VAT is due is the pound sterling value of the tokens at the point the transaction takes place. Exchange tokens received for mining are generally outside the scope of VAT. This, however, is an area to watch. HMRC flags up the possibility of change, pending other regulatory developments.