A cryptocurrency is a digital virtual currency which uses encryption technology, or cryptography in its creation to ensure the security of transactions involving its use. The original was Bitcoin, but there are many others including Dogecoin, LiteCoin and Ripple.
Over the past year or so, many types of cryptoassets have gained value and popularity as an investment option. Tesla Billionaire Elon Musk famously invested $1.5 billion in Bitcoin, and was credited with raiding the prices of Bitcoin and other cryptocurrencies through Twitter.
The UK’s approach to taxation of Cryptocurrency
As cryptocurrency investment levels and usage increases, global regulators are yet to establish a coherent approach to taxation across all jurisdictions.
There is a school of thought that disposal of crypto assets can be likened to gambling or lottery type winnings, however, this is not correct.
Cryptoassets aren’t treated by HMRC as a currency or money, with HMRC stating that ‘A trade in crypto asset exchange tokens would be similar in nature to a trade in shares, securities, or other financial products’ with case law which treats share trading as a benchmark for the tax treatment of crypto.
In the UK, cryptoasset gains (for Capital Gains Tax) are measured at the point the cryptoassets are sold, including when one currency of cryptoassets is exchanged for another (e.g., exchanging Bitcoin for Dogecoin) so unless there is a disposal there will be no Capital Gains Tax due. HMRC’s guidance notes state that whether tax applies will hinge on whether trade is being carried on. If the buying and selling of exchange tokens amounts to a trade will depend on factors which include frequency, level and type of the organisation and the intention of the exchange.
If it’s determined that the exchange(s) amount to trade, the receipts and expenses become a part of the calculation of the trading profit of that individual or company. This means that the profits from the trade will be also be subject to Income Tax.
For individuals who are not trading there is a tax-free Capital Gains Tax allowance of £12,300 during the current 2020-2021 and subsequent 2021-2022 tax years. Additional gains will be taxed at either 10% or 20%, but this will depend on the level of the individuals other income.
Finding that an individual’s activities amount to trading, and therefore subject to Income Tax, is unusual. However, if the activity is considered to be trading then for individuals’ Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses). The amount that needs to be paid will depend on the individual’s other income.
What about businesses?
For businesses trading in cryptoassets, the profits or losses will form part of the trading profits instead of being a chargeable gain for Capital Gains Tax.
Because crypto isn’t treated as a currency, companies are likely to exchange tokens as ‘intangible assets’ which will be taxed under Corporation Tax rules for intangible fixed assets if the token is an ‘intangible asset’ for accounting purposes and an ‘intangible fixed asset’ which means the asset has been created or acquired by a company for use on a continuing basis. However, if the tokens are held by the company, they will not meet this definition.
When the gains and losses are calculated from the disposal of crypto tokens, not all costs will be allowable as a deduction, as governed by Section 38 of the Taxation of Chargeable Gains Act 1992. HMRC’s view is that deductible costs include:-
- The consideration (in £ sterling) originally paid for the asset;
- The transaction fees paid for having the transaction included on the distributed ledger;
- Advertising for a purchaser or vendor;
- Professional costs to draw up a contract for the acquisition or disposal of the tokens; and
- Costs of making a valuation or apportionment to be able to calculate gains or losses.
These will be deducted against profits for Income Tax will not be allowable as deductions for Capital Gains Tax. VAT will also be due in the normal wat on goods or services sold in exchange for cryptoasset exchange tokens.
Financial Times: https://www.ft.com/content/ec2dc503-467a-4627-b35c-1c5aebb65010
HMRC Cryptoassets Manual: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual