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  • Crypto Tax Planning

    1 November 2021

    Alexander Wilson

    Crypto – Getting a Seat at the Table with the Grown-Ups

    As this year has progressed, we have seen a trend at ETC Tax. To date, we have been dealing with accidental millionaires from trading in crypto. Recently, we have seen a rise in the accidental artist millionaire and those who have seen the potential and deliberately set out to invest in various crypto activities.

    Consequently, the scope of our services to crypto clients has changed. Rather than looking backward at historical disclosure, we are looking forward and planning for future profits. Some of the new activities that we are now seeing (such as blockchain gaming) are not covered by HMRC guidance at all.

    Our earlier work in crypto assets was almost exclusively disclosure. A person trading between different crypto assets was typically generating CGT liabilities. With tax at the rates of 10% and 20% and favourable annual exemption for the individual, there was little tax advantage to be gained from planning.

    Of course, for a successful trader, a FIC or a trust may well be of interest for estate planning, though this may in fact increase the likely tax footprint as profit extracted or enjoyed would then be subject to income tax.

    NFT Artists

    There has been a recent gold rush on NFT art, which is hardly surprising when in June 2021, CryptoPunk #7523 sold at Sotheby’s for a staggering US$11.8 million. For those not in the loop, a CryptoPunk is one of 10,000 unique 8-bit pixel images of punks. They are digital images which are immutably identifiable on the blockchain, as is each sale and purchase. Quite why these pieces of ‘art’ sell for so much is a matter of some speculation and speculation is likely to be at least a part of the reason.

    The problem for the NFT artist is that the making of art, whether it is digital or tangible, brings us to the familiar territory of trade. When an artist sells a painting or a sculpture she has made, profits are reportable as sole trader income and NIC is in scope as well. Artists (some of whom are making six-figure sums in the space of a month or two) are looking at losing personal allowances, a top rate of tax of 45% and NIC in addition to that.

    If we ignored the novelty of crypto, the advice would be clear; incorporate as quickly as possible. That remains good advice in this case. As there is a trade, existing stock (unsold art) ought to be transferrable to the company without triggering a charge to CGT as incorporation relief ought to be available.

    VAT

    There is not enough space to consider VAT in this article. However, the keen-eyed reader will have noted the reference to six-figure receipts in the space of a month or two. That is clearly well over the VAT threshold. HMRC’s guidance here is unhelpful, focusing on BitCoin and similar assets and the result being that VAT is not due on buying and selling crypto.

    This guidance can not be relied on in the case of an NFT artist. The resulting ‘art’ may be intangible but there is clearly a trade and a supply. It is likely that HMRC will want to know why the company (or sole trader) is not registered for VAT.

    At ETC Tax we have a working position on this and we suggest that any client in this position seeks advice.

    Mining, Node Operators and Blockchain Games

    We have a number of cases where individuals (or small groups of people) are setting out to make a profit. In one case, by investing in the STRONG token, allowing them to operate Ethereum validator nodes, generating receipts of STRONG token for doing so.

    In another case, a small group of people invested in the Axie Infinity blockchain game. They now have dozens of people in the Phillipines, using the Axie’s (little cartoon animals which are also NFT’s) to play the game and generate SLP tokens as rewards. These are shared between the investor ‘managers’ and the ‘scholars’ playing the game.

    With individuals clubbing together to generate profit and even (in the case of Axie Infinity) taking on third-parties to generate income on behalf of the investors, the badges of trade will be present. Indeed, if no action is taken, in these scenarios it is likely that a general partnership was formed.

    Incorporation Relief and Intangible Assets

    On the face of it, in the case of the validator nodes and the little cartoon animals, we have a business, so if the whole of the business is transferred to a company, incorporation relief ought to be available to defer any gains which might arise.

    Unfortunately, because of the nature of the blockchain, the assets are held by privately owned private keys (akin to a bank account, to an extent). For practical reasons, transferring assets to a new private key owned by the company may be problematic – on the blockchain, the public key (derived from the private key) is the entirety of all reputation, it is often the only identity recognised on the blockchain. For example, the artist’s identity on the blockchain is his public key.

    So, it is vital get the details of the transaction correct to ensure that there is a genuine transfer of all the assets of the business to the company, while at the same time ensuring continuity of the business on the blockchain. Legal advice may be needed.

    What is more helpful is HMRC guidance on intangible fixed assets which confirms that crypto assets will often fall into that regime. This is also a topic in itself but there are options for claiming relief for expenditure on crypto assets acquired by the business, depending on whether the expenditure is for an asset to be used in the trade, or even roll over relief for the acquisition of new assets of a similar type by way of reinvestment.

    The World of crypto is developing at pace and the need for proactive planning is increasingly urgent. We aren’t choosing from the children’s menu any more!

    Get in touch today for expert and experienced crypto tax advice.

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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