In 2009 the first decentralised cryptocurrency, Bitcoin, was launched and at this point it was a concept widely unknown and badly understood. Now, based on research by the Financial Conduct Authority published in June 2020, an estimated 2.6million adults in the UK had owned cryptoassets at some point in the year.
At LK & Associates we are seeing an increase in questions, often weekly enquiries, around the area of cryptoassets where only a few years ago it was rare to hear of client ownership or interest at all.
What you need to know
Amazingly there is currently no tax legislation that specifically addresses the treatment of cryptoassets, instead direction can be found in HMRC’s internal guidance manual published 30 March 2021.
The guide states that this is HMRC’s interpretation of the law as it relates to cryptoassets. Still, it is a useful starting point.
HMRC recognise that many if not most individuals hold cryptoassets as a personal investment, mostly for capital appreciation but also to use them as currency.
This blog comments on the tax treatment of those individuals, not on the relatively unusual situation where an individual runs a business that carries on a financial trade in cryptoassets.
HMRC do not view cryptoassets as currency
HMRC’s view is that the tax treatment of the different types of cryptoasset tokens depends on the nature and use of the token. Most of the guidance relates to tokens that can be used as a means of payment as well as held as an investment, also known as exchange tokens.
Despite cryptoassets often being referred to, and sometimes being used like, currency HMRC do not accept that tax treatment applicable to currency applies to cryptoassets. Instead HMRC view these as intangible assets.
HMRC do not view cryptoassets as gambling
HMRC guidance confirms that in general they do not believe that the buying and selling of cryptoassets constitutes gambling, despite the volatility of the assets involved.
HMRC view may change
Treatment of cryptoassets as assets appears to hinge on their volatility and therefore their tax treatment could perceivably change at some unknown point in the future.
The current tax treatment of cryptoassets as assets
Assets are chargeable to Capital Gains Tax on sale based on the difference between the sale price and original purchase price. Where an individual buys cryptocurrency via a cryptoasset exchange the only occasion of potential tax charge will be on disposal.
A disposal for Capital Gains Tax includes a straight sale and the use of one cryptoasset to acquire another asset (either tangible or intangible).
The majority of cryptoasset tokens are likely to be able to be dealt in without identifying the particular tokens disposed of or acquired and therefore tokens of the same type will be pooled in the same way as for shares and securities and with the same ‘matching rules.’
However, if cryptoassets are received in exchange for mining activities (that do not amount to a trade), the sterling value of the cryptoassets received will be taxable as miscellaneous income, subject to reduction for any appropriate expense. Cryptoassets received as a result of staking (where new tokens are awarded based on the number of tokens already held) are also taxable as miscellaneous income.
Cryptoassets received as employment income are subject to income tax and national insurance based on their value. Exchange tokens that can be traded on exchanges are also regarded by HMRC as readily convertible assets.
Cryptoassets received in an airdrop may not be taxable if received in a personal capacity and not as recompense for services or goods.
Issues can arise in relation particularly to crypto-to-crypto exchanges or in other circumstances where market value is required. HMRC guidance states, in relation to valuations, only that ‘reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology’. Where the transaction takes place via an exchange, the values quoted by that exchange and used in the transaction are arguably the ‘market’ value, although there could be difficulties where different exchanges quote slightly different prices. There is also the practical difficulty that prices typically fluctuate throughout the day, therefore it is advisable to accurately record the time the transaction takes place.
Some cryptoassets that are not exchange tokens may not be quoted on an exchange and other methods of valuation may have to be used to arrive at an ‘appropriate valuation’. In the case of security tokens where a valuation of the underlying company may be needed this can be costly and open to HMRC disagreement.
What if I lose access to my Cryptocurrency?
One capital gains tax provision that may be particularly useful in relation to cryptoassets relates to negligible value claims. If, for example, an individual loses a private key and can no longer access cryptoassets owned, the assets themselves will still exist and therefore have not been disposed of. In such cases, it may be possible to make a negligible value claim to establish a capital loss. Such a claim might also be useful in the event of fraud that caused tokens to become worthless (but would not be possible if the tokens were already worthless when acquired).
What should I do?
Although HMRC’s guidance is a helpful start, there remain several areas of uncertainty around the tax treatment of cryptoassets.
Careful attention should be given to keeping a clear track of your purchases and sales so that you can confidently assess your capital gains tax position from year to year.
If you are thinking of, or currently actively buying, selling or exchanging cryptocurrency and would like further guidance then please get in touch to discuss your circumstances.
US tax considerations
If you are a US citizen or resident, you will also have to consider the US tax implications of owning cryptoassets. There are reporting requirements on the 1040 return if you have traded in cryptoassets, as well as having to calculate any gain or loss. As the US return must be reported in US dollars, the gain or loss for US tax purposes might be different to the UK gain, leading to double taxation.
Depending on how you hold such assets, you might also have a reporting requirement on Form FinCen114 Foreign Bank Account report and on the FACTA form 8938, report of Specified Foreign Financial Assets.
The tax rules on cryptoassets are complex. Please contact us to discuss your individual circumstances in more detail.
Our tax team are here to help
If there are any issues in this article that you would like to discuss in more detail, or to establish how your crypto currencies could affect your tax position please contact us to schedule an appointment with one of our Tax Specialists.
Coming soon – On Wednesday 28th July (12pm) Robyn Milstead, our Head of Tax will be hosting a bitesize webinar on Crypto Currencies. Register your interest here.