Cryptoassets & HMRC – what you need to know.
What is a crypto asset/cryptocurrency?
Cryptoassets are digital assets which use cryptographic techniques to generate a medium of exchange of financial transactions. Cryptocurrencies, utility coins, security tokens are all different types of crypto assets. A cryptocurrency is a digital or virtual currency.
The first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ reflecting the secure technology used to record who owns what, and for making payments between users.
The second part of the word, ‘currency,’ tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.
How HMRC treat crypto assets
Currently, there is no tax legislation that specifically addresses the treatment of crypto assets. To address this, HMRC published an internal guidance manual on crypto assets which sets out the HMRC interpretation of the rules surrounding the tax treatment of crypto assets.
HMRC considers crypto assets to be capital assets held for investment purposes. The sale or disposal of crypto assets will usually generate a capital gain or loss for tax purposes.
Capital gains may occur when you:
- sell crypto asset tokens
- exchange crypto asset tokens for a different type of crypto asset token
- use crypto asset tokens to pay for goods or services
- give crypto asset tokens away to another person (excluding a spouse or civil partner).
The gain on the disposal of crypto assets is typically the crypto asset value at disposal less:
- the cost of purchase
- transaction fees
- advertising for a purchaser
Purchases and sales of crypto assets are “pooled” for tax purposes. This means that there is no need to track gains or losses for every transaction individually, as acquisition costs are effectively averaged out when calculating the gain or loss on each. Each type of crypto asset must however, be kept in its own pool. The specific method of taxation and the amount chargeable depends on whether the investment is held by an individual or within a structure such as a limited company.
Crypto assets and individuals
Net crypto asset gains after the utilisation of any available capital losses in the tax year should be reported on an individual’s tax return. UK tax payers also have a capital gains tax exemption each year. The exemption for the 2021/22 tax year is 12,300. Those with smaller crypto asset portfolios might not therefore owe any tax but it may still be necessary to report disposals.
Crypto assets and companies
Disposals of crypto assets owned within company structures are reported on the company’s corporation tax return and the gain is chargeable to corporation tax. Losses from previous sales or from elsewhere within the business may be available to offset against the gain and reduce the tax.
Crypto assets and traders
In some exceptional cases, HMRC may consider a crypto assets activity to be a trade. Whether the buying and selling of crypto assets amounts to a trade will depend on a range of factors including:
- the frequency of transactions
- level of organisation
- the intention of the transactions made
Where activities do amount to a trade, the receipts and expenses will form part of the calculation of the individual or company’s trading profit and will potentially be subject to different types of tax at higher rates.
HMRC states that it is the taxpayer’s responsibility to keep separate records for each crypto asset transaction.
Records may include details of:
- the type of crypto asset
- the date of transactions
- whether they were bought or sold
- the number of units involved
- the value of the transactions
- the cumulative total of the investment units held
- bank statements and wallet addresses, which may be needed in the event of an enquiry or review
Although HMRC’s stance is beginning to emerge there remain several areas of difficulty, as the guidance states that ‘our views may evolve further as the sector develops and HMRC may publish amended or supplementary guidance accordingly’.In a fast-moving area rules and regulations are in constant flux.
This article was correct at the date of publication. It is intended as an aid and cannot be expected to replace current, specific professional advice and judgment.
If you have any questions about crypto assets and tax please get in touch with our tax partner, Robin Stevenson.
Robin Stevenson - Tax Partner
Tel: 01825 763 366
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