Income tax is generally applied to individuals who are buying and selling, or receiving cryptocurrency, as part of a trade.
For example, the most obvious would be the ‘day-trader’ who is actively buying and selling cryptoassets with the view to realising a short-term profit. Even in these circumstances, it is generally difficult to fall within the description of a ‘trader’ and HMRC generally accept that individuals will be subject to the more favourable rates of capital gains tax (see below).
In order to fall within the description of trading, individuals will need to buy and sell cryptoassets with such frequency, level of organization, intention and sophistication that the activity amounts to a financial trade in itself. If the threshold of trading is met, the net profits will be subject to income tax at 20%, 40% and 45% and national insurance at 12% and 2%.
In most circumstances, a person who trades on their own account is unlikely to meet the description of a ‘trader’ for income tax purposes and will more than likely fall within the capital gains tax regime.
Capital Gains Tax
In most cases, an individual buying, holding and selling cryptocurrency on their own account will be deemed to carry on an investment activity and subject to capital gains tax.
The disposal of cryptoassets will result in a taxable event, with the value of any disposal proceeds matched against purchases in a specific order:
- Cryptoassets acquired on the same day;
- Cryptoassets acquired in the following 30-days
- The average cost of any unmatched cryptoassets (known as the ‘pool’)
The amount of the capital gain is the difference between the value of the disposal proceeds and the value of the acquisition cost per the matching rules.
you pay capital gains tax on your total gains above an annual tax-free allowance which is currently £12,300 for individuals. Any gains realised above this allowance will be taxed at 10% up to the basic rate tax band (if available) and 20% on gains at the higher and additional tax rates.
What about Airdrops, Forks and Staking?
Airdrops – Where an individual has participated in a crypto airdrop, they are deemed to have acquired the asset at a ‘nil’ cost which will then be matched against a disposal or added into the pool. If the person is ‘trading’ and subject to income tax, the value of the airdrop will be subject to income tax.
Hardforks – Where a fork results in a new cryptoasset being created, the individual must allocate a share of the cost of the original cryptocurrency to the newly acquired or created cryptoasset. This does not create a tax liability but does ‘split’ the cost of the old asset, so that a future disposal may result in a greater liability. If the person is trading, the value of the received cryptoasset will be assessable to income tax.
Staking – Staking is akin to investment income and will be deemed to be subject to income tax regardless of whether a person is trading or not.
Unique and Complex Cases
Cryptoassets and the underlying technology is constantly evolving and the existing tax rules are not apt to deal with this.
For arrangements which go beyond the basic scope of acquiring and selling cryptoassets via a trade, airdrop, fork or staking, care needs to be taken to ensure the correct tax rules are being applied.
The tax treatment will often be ambiguous and reliance on a tax specialist who is familiar with the industry, technology and issues is paramount. We are regularly reviewing unique and complex cases with more recent involvement in reviewing the position of Non-Fungible Tokens (“NFTs”) and NFT based gaming platforms whereby the transactions may be excluded from tax all together.
Residency and Domicile
The location or ‘situs’ of cryptocurrency is particularly important for non-resident and non-domiciled persons. HMRC take the view that cryptoassets follow the residency of the individual. However, this is a simplistic approach to a complex issue and there is no authority in favour of HMRCs approach.
On this basis, if a person is not tax resident in the UK then there will not generally be any tax exposure in the UK. For persons who have left the UK, there are strict anti-avoidance rules which can create a tax liability on if tax residency is resumed in the the UK within five years.
Where a person is tax resident in the UK, but is not domiciled in the UK, they may elect for the remittance basis. This allows a person to escape UK taxation on foreign income and gains until those foreign income and capital gains are remitted to the UK, and indefinitely otherwise.
Based on HMRCs view of the location of cryptoassets, a non-domiciled person would not be eligible for the remittance basis on cryptocurrency income and gains. However, the location of the assets could also be:
- The location of the exchange entity holding cryptoassets
- The location of the services which host the technology
However, this would be contrary to HMRCs view and any such position taken should be disclosed accordingly with the potential for HMRC to query and / or challenge any remittance basis claim.
With that said, it would not be an unreasonable approach to take subject to the appropriate disclosure and filings.