Although cryptoassets are still a relatively new asset class and they remain mysterious to many people, there is no doubt they are becoming ever more mainstream.
They continue grow in popularity with investors appearing to overlook pricing volatility in the hope of gaining a profit if valuations soar. Cryptoassets are not just an asset class for investments either, increasingly they can be used as a form of currency too.
However, HMRC takes an interest when trades and gains are made. The tax authority can access data from crypto exchanges, so it is important to ensure that all activity is fully compliant and reported where appropriate. Here, we take a look at cryptoassets and their treatment by the taxman.
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.
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 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.
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.
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.
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.
If you trade, invest or accept cryptoassets as payment for services then there may well be tax implications. Please don't hesitate to contact us to discuss any matters related to cryptoassets and tax.