Tax and Crypto Assets
2009 saw the launch of Bitcoin. Originally seen as being just for geeks and possibly hackers, crypto assets are becoming more common and even considered mainstream by many.
The increased interest in crypto assets has been noted by HMRC. If you invest or trade in crypto assets and you pay taxes in the UK, you need to be aware that HMRC has taken an interest in the taxation of your virtual currencies
What are crypto assets?
Crypto assets, often also referred to as cryptocurrencies or crypto tokens, are essentially electronic currencies which are offered as an alternative to centralised national currencies. The most common examples are Bitcoin, Ethereum and non-fungible tokens (NFTs).
The most common use of crypto assets is private investors buying them in the belief they will appreciate in value. In addition, as they are decentralised and do not rely on the global banking system, they are an option to transfer large sums of money quickly and at low cost. Some businesses are starting to use them too.
Crypto assets (including crypto currency) are different from “normal” currency like pounds sterling, or US dollars. They are also different from stock and shares, however the value of crypto currencies can fluctuate as with shares.
There is no UK taxation legislation specific to crypto assets. As a result, the taxation of crypto assets follows the general rules for Capital Gains Tax, Income Tax and Inheritance Tax
Capital Gains Tax (CGT)
Although often referred to as cryptocurrency, HMRC does not consider crypto assets to be currency or money. Instead HMRC takes the view that crypto assets are property and therefore a chargeable asset for CGT purposes.
HMRC expects that the buying and selling of crypto assets by an individual, in the majority of cases, will be an investment activity. Therefore, a disposal of a crypto asset will normally be subject to CGT. A ‘disposal’ could include:
- selling crypto assets for cash
- exchanging a crypto asset for a different type of crypto asset
- using crypto assets to purchase goods or services
- giving away crypto assets to another person.
As with some other assets, further rules apply when you have multiple holdings of the same crypto asset which are brought together and form one asset for CGT purposes. This is known as pooling. An individual’s allowable cost on the disposal will be the average cost of the assets in the pool, rather than the cost of any specific acquisition.
We always encourage clients to maintain good records with any business activity. This is even more important in relation to crypto asset trading. It is common for retrieval codes (or ‘private keys’) to be lost. Without this, there is no proof of ownership and the crypto asset becomes unusable
If the holder of the crypto asset is carrying on a trade then Income Tax will be applied to their trading profits. There are certain crypto activities which are treated as miscellaneous income and will be subject to Income Tax. It is for the individual undertaking the crypto activities to ascertain if the activities should be declared as trading income or miscellaneous income in their self-assessment tax returns.
Examples of crypto assets which could be treated as trading or miscellaneous income by HMRC are:
Mining – Where you earn rewards on certain types of crypto assets by “mining”. Mining is a reward for devoting time and energy to solving mathematical problems.
Staking – Staking occurs on some crypto assets where you earn rewards. These rewards are similar to earning interest in a bank account, however unlike interest, income from staking is not treated as savings income. Instead it is treated as trading or miscellaneous income.
Airdrops – Airdrops are when the owners of crypto assets are provided with additional crypto assets for some reason. These airdrops could be free with nothing expected in return. However, airdrops could be provided for doing something in return such as completing a survey. In these circumstances the airdrops will be taxable.
Employment income – Equally, if crypto assets are received as employment income they are considered to have monetary value and are subject to income tax and national insurance contributions on the value of the assets.
Where the crypto assets can’t be easily converted for cash, you would normally be required to pay employee National Insurance on the amount. Your employer should either deduct the tax from you under PAYE or report the amount on a form P11D
Value Added Tax (VAT)
Should any goods or services be sold in exchange for crypto assets, VAT is due in the normal way. When crypto assets are exchanged for goods and services, no VAT will be due on the supply of the crypto asset itself.
Inheritance Tax (IHT)
Any value attributed to a crypto asset forms part of an individual’s estate for IHT purposes. However, a feature of crypto assets is that they don’t have a physical existence and this could present a problem as to which jurisdiction applies the taxes.
Individuals who are domiciled in the UK are subject to IHT on their worldwide assets. Nondomiciled individuals are only subject to IHT on UK ‘situs’ assets (ie. assets located within the UK).
To date, HMRC has not issued guidance on this issue. As a result, we would recommend that individuals keep a full list of the crypto assets within their estate, and the private keys, to assist the personal representatives in the administration of their estate.
If you require any clarification on the implications of crypo assets and tax, please do get in touch.