Capital Gains Manual Cryptocurrency Update


Rohan Manro

A tax adviser, Rohan successfully completed and passed his final CTA examinations (Advisory & Application and Interaction for owner-managed businesses).

HMRC have updated their CGT manuals providing an update to their understanding of cryptocurrency and block-chain technology, with clarity in determining how capital gains from cryptocurrency are computed and the tax position of “hard-forks”.

Following the cryptocurrency boom at the back end of 2017 which saw a surge in the value of Bitcoin, Ethereum and other cryptocurrencies, HMRC have recently updated their Capital Gains Manuals.

HMRC consider that cryptocurrency is ‘an evolving area and work in determining their legal and regulatory status is ongoing’ but regardless of its volatility and lack of regulation, new and unique cryptocurrencies emerge daily.

HMRC recognises the various potential uses of cryptocurrency with more UK businesses accepting it as payment for goods and services, a growing number of sophisticated investors and as a means of raising finance via Initial Coin Offerings (“ICOs”). Newly developed technologies, software and exchanges are bringing down barriers to access for all of these.

HMRC’s update states that transactions in cryptocurrency may be charged to tax as income, capital gains or escape taxation as gambling. It remains interesting that HMRC accept the ‘gambling’ analysis as a potential filing position, although the basis on which their view is arrived at is not wholly clear.

The Manual goes on to analyse in detail the taxation of cryptocurrency where it is considered an asset subject to capital gains tax. The will likely be the most common treatment. HMRC have clarified the position regarding:

  • How one calculates gains and losses; and
  • the tax treatment of a ‘hard-fork’.

Calculating gains and losses

Where a person acquires their holding of a cryptocurrency in multiple tranches at different prices and subsequently sells a portion of their holding, to consider the gains or losses arising for capital gains tax purposes, they must establish the cost of the asset being sold.

As a cryptocurrency is an intangible asset, you might struggle to match the proceeds from a sale with the cost of the asset being sold. HMRC have suggested the “matching rules” that already apply to shares, securities and foreign currencies will apply to disposals of cryptocurrency too. Under these rules the disposal of cryptocurrency would be matched against the same type of cryptocurrency in the following order:

  1. acquired on the same day; then
  2. acquired in the last 30 days; then
  3. the s104 pool.

The s104 pool represents the balance of all such assets with each unit being treated as acquired at the same average cost.

Hard forks

A “hard-fork” occurs when a team of developers splits, with the departing developers creating a new cryptocurrency and giving an equivalent amount of the new cryptocurrency to the holders of the ‘old’ cryptocurrency.

HMRC draws a comparison with other assets which may be merged or change their nature or rights or interests in and over assets which may be created or extinguished. Such changes may result in the value of an asset disposed of deriving from another asset and, if so, the allowable expenditure should be ‘traced’ to the assets from which the asset disposed of is ‘derived’. More straightforwardly, HMRC suggest that in these circumstances it may be that the new holding inherits a proportion of the base cost of the old one.

HMRC’s latest intervention provides useful clarification of some technical issues but the Manuals also comment that each cryptocurrency needs to be considered based on its own individual facts and applying the relevant legislation and case law.

Ultimately, each cryptocurrency is unique and particularly when considering a more obscure cryptocurrency, you should therefore endeavour to understand the technicalities of how it operates as this may impact the tax position.

Further you should not forget that HMRC’s own views can change and the statements made in the Capital Gains Manual appear to come with more than the usual number of caveats and disclaimers.

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ETC can help with Capital Gains Tax on Cryptocurrency 

Given the lack of clarity as to the taxation of cryptocurrency, taxpayers should carefully consider their circumstances and disclose the basis on which they have determined their tax position and filed their tax return to HMRC. This will provide some element of protection should HMRC look to challenge a taxpayer’s filing position.

For advice on the taxation treatment of your transactions and dealings in cryptocurrency, contact us for a no-obligation initial consultation with one of our chartered tax advisers.

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