Cryptocurrency tax is an area of growing concern for investors, traders and businesses as cryptocurrency and Cryptoassets become more popular.
This rapid growth has also attracted notable attention from HMRC, who are eager to ensure that all businesses, investors and traders are paying the correct amount of tax on cryptoassets. It is important that anyone active in this sector has their tax affairs structured correctly, in a tax efficient way, whist remaining compliant with HMRC. This will help to avoid any penalties and fines as well as unplanned tax bills.
As a relatively new area, cryptocurrency/cryptoasset tax rules are fast-moving, so it is important to keep abreast of the current and fast developing legislation. HMRC will look at the facts of each individual case in determining any taxable liability and its views may change as the sector continues to evolve.
The specialist team at Alexander & Co is experienced with dealing with the tax issues surrounding cryptoassets and cryptocurrency for traders, investors and businesses. We can ensure that your affairs are structured correctly, in the most tax efficient way and are compliant with HMRC. We are also able to help resolve any current HMRC investigations and by ensuring you remain compliant, minimise the likelihood of any future investigations.
To discuss how we can assist you please contact a member of our specialist team.
Cryptocurrency tax – which taxes apply to Cryptocurrency and cryptoassets?
Cryptocurrencies are virtual or digital currencies that use cryptographic functions to carry out financial transactions and are not controlled by any central authority. They leverage blockchain technology to gain this decentralisation.
Cryptoassets are the assets that are stored on distributed ledgers. This not only includes all cryptocurrencies but also non-currency assets such as utility tokens and security tokens.
HMRC does not deem the buying and selling of cryptoassets to be the same as gambling. Depending upon how cryptoassets are held, Capital Gains Tax, Income Tax and Inheritance tax can all apply.
Mostly, people hold cryptoassets as personal investments, typically for capital appreciation or to make specific purchases. Capital Gains Tax may be liable, when cryptoassets are disposed.
You will also usually be liable for Income Tax and National Insurance contributions on cryptoassets held by individuals, when they are received from either:
- An employer as a form of (non-cash) payment, or
- From airdrops, transaction confirmation or mining
For the purpose of Inheritance tax, Cryptoassets are treated as property.
Income Tax on cryptoassets
Financial trading of cryptoassets
Cryptoassets are taxed by HMRC based on what the person holding it does. If they are conducting a trade, then Income Tax is applied to the holders trading profits.
Where it is considered that an individual is trading in cryptoassets, Income Tax takes priority over Capital Gains Tax and will apply to profits or losses the same as it would be considered as a business.
The question as to whether an individual’s cryptoasset activities amount to a trade or not depends upon several, often complex factors. This is an area where professional advice can be helpful, both to clarifying the situation and where necessary, in dealing with HMRC. At Alexander & Co we can assess your individual situation and advise you.
Tax on cryptoasset mining
Individuals are often awarded cryptoassets through ‘mining’ for verifying additions to the blockchain digital ledger.
If cryptoassets are received as trade receipts and amount to a taxable trade, how they are taxed is dependent upon a range of factors. These include:
- The commerciality of the activity
- The degree of activity
- The organisation
- The risk involved
Again, this can be a complex area and our specialist tax advisors are able to advise on whether your activity would constitute trading.
Where this is not considered a trade, the value, calculated in pounds sterling at the time of receipt of any cryptoassets awarded, is taxable as miscellaneous income.
Where these awarded cryptoassets are retained by an individual, Capital Gains Tax may have to be paid, where they are then disposed later.
Cryptocurrency tax on fees received from mining cryptoassets
Any fees or rewards received in return for mining (for transaction confirmation) are liable for Income Tax.
This will again be either as trading or miscellaneous income, dependent on the factors outlined above.
An individual may also be liable for Capital Gains Tax for any cryptoassets received if there is an increase in value between acquisition and disposal. In the situation of a trade, this would be considered in computing trading profits.
Tax on airdrops from cryptoassets
Income Tax is not always applied to airdropped cryptoassets, where these are received in a personal capacity.
In this situation, income tax may not apply if they are received without doing anything in return for the tokens and not as part of a trade or business involving cryptoassets or mining.
Where airdrops are provided because of a service (or expectation of a service) these will be subject to Income Tax, as miscellaneous income or as receipts of an existing trade, dependent upon the circumstances.
Disposing of cryptoasset gained through an airdrop will be liable for Capital Gains Tax, (regardless of whether it is chargeable to Income Tax when received).
Income Tax will take priority over Capital Gains Tax, where changes in value are brought into account in the computation of trade profits.
Cryptoassets and Income Tax losses
Where an individual is trading, they may be able to reduce Income Tax liability through offsetting losses from their trade against future profits or other income.
Where profits from activities are taxable as miscellaneous income, you may be able to carry forward losses to later years.
Cryptocurrency Tax – Cryptoassets and Capital Gains Tax
Buying and selling of cryptoassets by an individual is usually classed as investment activity (dependent on the frequency and amounts involved). In these circumstances, an individual will usually have to pay Capital Gains Tax, where gains are realised.
For Capital Gains Tax purposes, cryptoassets count as a ‘chargeable asset’ as they are both capable of being owned and have a value that can be realised.
What is a disposal for Capital Gains Tax purposes?
When disposing of a cryptoasset, the gain or loss needs to be calculated to ascertain if Capital Gains Tax needs to be paid. This includes the following scenarios:
- When selling cryptoassets for money
- When exchanging one type of cryptoasset for another type
- When cryptoassets are used to pay for goods or services
- When cryptoassets are given away to another person (other than a spouse)
For example, if you were to trade Bitcoin for Ethereum, this would be a disposal for capital gains tax purposes, even if you do not then convert the Ethereum into pounds. You might be required to disclose this transaction to HMRC and pay tax on it.
When a cryptoasset is donated to charity, an individual will not have to pay Capital Gains Tax on them, subject to certain exceptions.
Pooling of cryptoassets
Pooling provides a method of simpler Capital Gains Tax calculations. HMRC states that Cryptoassets must be pooled.
Using this method, each type of cryptoasset is kept in a separate ‘pool’. The consideration (converted to pound sterling) originally paid for the tokens is entered into the pool, creating the ‘pooled allowable cost’.
Where only some tokens from a pool are sold, this is known as a ‘part-disposal’. In this instance, a proportionate amount of the pooled allowable costs is deducted when calculating the gain or loss.
Acquiring within 30 days of selling (bed and breakfasting)
If an individual acquires tokens of a cryptoasset on the same day that they dispose tokens of the same cryptoasset (even if the disposal took place before the acquisition) or within 30 days after they disposed of tokens of the same cryptoasset took place, special pooling rules will apply.
Where these rules apply, these new assets and the costs of acquiring them remain separate from the main pool. The calculation for the gain or loss should be made using the costs of the new tokens of the cryptoasset that are kept separate.
Where the number of tokens disposed of exceeds the number of new tokens acquired, the calculation of any gain or loss can also include an appropriate proportion of the pooled allowable cost.
Tax on Cryptoassets received as earnings
Where cryptoassets are received as employment income, these are classified as money’s worth (as they are “something that is capable of being converted into money or something of direct monetary value”). Accordingly, cryptoassets are subject to Income Tax and National Insurance contributions on the value of the asset.
Tax on cryptoassets provided in the form of Readily Convertible Assets (RCAs)
Cryptoassets are classed as RCAs where a trading arrangement exists (or is likely to come into existence).
As exchange tokens can be exchanged on token exchanges for money, HMRC rules that trading arrangements exist, (or is likely to come into existence) at the point where employment income is received in cryptoassets.
Employers with a UK tax presence must deduct and account to HMRC for Income Tax and Class 1 National Insurance contributions due via PAYE.
Where an employer is not able to deduct the full amount of Income Tax due, they must still account to HMRC for the balance. In these circumstances, the employee must reimburse their employer within 90 days of the end of the tax year.
Note that these rules only apply to individuals who are employed and not self-employed.
Tax on cryptoassets which are not Readily Convertible Assets
Where these cryptoassets are received as earnings from employment, they are still subject to Income Tax and National Insurance contributions.
Employers do not have to operate PAYE in this instance. Instead, an individual must declare and pay HMRC the Income Tax due from such cryptoassets within a Self Assessment return.
The employer should however treat these payments as payments in kind for National Insurance contribution purposes, paying any Class 1A National Insurance contributions to HMRC.
Again, these rules only apply to individuals who are employed and not self-employed.
Subsequent disposal of tokens
Any disposal of the cryptoasset at a future date, which was received through employment, may result in a chargeable gain for Capital Gains Tax.
Self Assessment tax returns
Cryptoassets are traded on exchanges which do not use pound sterling (such as Bitcoins). In these instances, their value must be converted into pound sterling on a Self Assessment tax return to assess the value of any gain or loss
Where the transaction does not have a pound sterling value, such as if it has been exchanged for one cryptocurrency into another, an appropriate exchange rate must be established, converting the transaction to pound sterling.
Cryptocurrency tax – further considerations
Non-domiciled individuals and cryptocurrency tax
If an individual is a resident of the UK, HMRC considers that any exchange tokens they hold as a beneficial owner are also located in the UK and therefore liable for UK tax.
Where a resident is Non-domiciled, any exchange tokens they hold as a beneficial owner would not usually be liable for UK tax.
In instances where an exchange token is co-owned between at least 2 beneficial owners, each beneficial owner’s interest is where they are resident. If at least one of these co-owners are resident in the UK, this does not affect the location of the asset for those co-owners who are not UK residents.
For the purposes of Inheritance Tax, cryptoassets are classed as property. As such, they will be liable for inheritance tax in the same way and inheritance tax planning should be considered.
Pensions and cryptocurrency tax
Cryptoassets cannot be used to make a tax relievable contribution to a registered pension scheme as HMRC does not consider cryptoassets to be a currency or money. If an individual had or was considering holding cryptocurrency as an investment as part of a pension, advice should be sought on tax planning in relation to a pension.
Cryptocurrency tax – contact us for advice and assistance
At Alexander & Co, all our tax accountants are fully certified, ensuring we provide expert advice to help reduce your tax liability as much as possible and keep you on the right side of HMRC.
We offer a complimentary initial consultation to review your personal circumstances and discuss the best route forward. This can be arranged face to face, or if you prefer via phone or video call.
In addition to providing cryptocurrency tax advice, we provide a comprehensive range of tax and accountancy services. To discuss how we can assist you please contact a member of our specialist team by calling 0161 832 4841, emailing firstname.lastname@example.org or simply filling out contact form on this page.
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