Tax on Cryptocurrency

Do you need to pay UK tax on your cryptocurrency activity?

What are Cryptoassets?

Cryptoassets, also referred to as cryptocurrencies, are defined as:

“cryptographically secured digital representation of value or contractual rights [that] can be transferred, stored or traded electronically.”

Need to know…

Cryptoassets are characteristically used,

  • As a means of exchanging value;
  • To Invest; and,
  • To create and/or raise capital.

There are currently over 2000 different cryptoassets on the market, many with their own unique characteristics and differences, the biggest and most well-known being Bitcoin. The value of Bitcoin rocketed to over $19,000 in December 2017, with many investors and traders making a significant amount on this surge in value. However, within two months of this valuation, Bitcoin dipped to just over $6000 per coin, which is demonstrative of the unpredictable nature and fluctuating value of cryptoassets.

Cryptoassets have been the significant focus of many Governmental organisations in recent years, both within the UK and around the world. Different jurisdictions are approaching policy on cryptoassets in various ways. In the most extreme circumstances, four countries (Bangladesh, Bolivia, Ecuador and Morocco) have banned cryptoassets and China, albeit one of the most active cryptoasset markets, have banned crypto exchanges and financial institutions and payment processors from handling cryptoassets.

Importantly, key financial institutions, such as HMRC, the Bank of England, the European Central Bank and the Financial Conduct Authority state that cryptoassets are not currency or money. Therefore, although some may dispute this characterisation, it is important to note this when considering how these may be dealt with by Governmental bodies, such as HMRC.

Therefore, within a tax context, cryptoassets are synonymous with other assets, such as shares and will be treated as such.

bit coin

Cryptocurrency Tax in the UK

Generally, those who have disposed of cryptoassets will be taxable to either capital gains tax (CGT) or income tax (IT). Alongside this, there may be additional taxes that individuals may be taxable to too, such as national insurance (NI), or alternatively subject to another tax, such as corporation tax (CT), where taxable activity is undertaken through a company.

HMRC confirm that the overall majority of taxpayers will be subject to CGT on the disposal of their cryptoassets. This is because the cryptoassets are predominantly held as investment property and therefore, these will be given comparable treatment to assets, such as shares.

If taxable to CGT, a taxpayer will pay tax at the rates of 10% or 20%, dependent upon the taxpayers’ level of income.

CGT will be chargeable on the following taxable events:

  • Selling cryptoassets for money;
  • Exchanging cryptoassets for a different type of cryptoasset;
  • Using cryptoassets to pay for goods or services; and,
  • Gifting cryptoassets to another person.

Alternatively, a taxpayer will be chargeable to income tax (IT) and national insurance (NI) in circumstances where cryptoassets have been:

  • Received as earnings;
  • Mined;
  • Airdropped; or,
  • Traded

IT is chargeable at the rates of 20%, 40% and 45% and NI is chargeable to 12% and 2%.

If income tax is applicable, HMRC state that IT treatment will take priority over CGT treatment.

In its previous 2014 guidance, HMRC stated that some may not be taxable on their crypto activities because they fall into the definition of either,

  • Gambling; or,
  • Highly speculative activity.

However, in the most recent guidance, HMRC expressly rule out the possibility of gambling and is silent on whether anyone could raise the ground of highly speculative activity. It is worth noting, the legislative provisions underlying these grounds do stand and this guidance is merely HMRC’s opinion on the tax treatment of cryptoassets. As a result, if (perhaps in the unlikely circumstances) someone did fall into either category then these options still stand.

Capital Gains Tax of Cryptoassets

Taxpayers will be chargeable to CGT on the disposal of cryptoassets in a number of circumstances, these include:

  • Selling cryptoassets for money;
  • Exchanging cryptoassets for a different type of cryptoasset;
  • Using cryptoassets to pay for goods or services; and,
  • Giving away cryptoassets to another person.

The value attached to the cryptoasset on each taxable event, detailed above, is the pound sterling value attributable to the cryptoasset at the point of the taxable event. This may add a level of complexity as not all cryptoassets have a direct pound sterling value. For example, some cryptoassets must be exchanged to another cryptoasset first, in order to realise a fiat currency value, which will then provide a pound sterling value. Therefore, it is advisable that those buying and selling cryptoassets should keep a record of all relevant values at each taxable event, that directly or indirectly give each cryptoasset a pound sterling value.

When calculating whether there is a gain or a loss, the following are allowable costs:

  • The consideration (in pound sterling) originally paid for the asset;
  • Transaction fees paid before the transaction is added to a blockchain;
  • Advertising for a purchaser or a vendor;
  • Professional costs to draw up a contract for the acquisition or disposal of the cryptoassets;
  • Costs of making a valuation or apportionment to be able to calculate gains or losses.

However, the following will not be allowable in calculating whether there is a gain or a loss:

  • Any costs deducted against profits for Income Tax;
  • Costs for mining activities (for example equipment and electricity).

As is applicable for shares, s.104 pooling is applicable, which provides a methodological way to calculate taxable gains.

If a taxable disposal occurs and a loss is made, this may be relievable against any other gains made in the current year or carried forward to relieve future gains.

Income Tax of Cryptoassets

In the majority of cases CGT will apply and therefore, taxpayers will not be chargeable to IT on the disposal of cryptoassets. However, where IT does apply it will take precedence. There are a number of circumstances where IT will apply, these are:

  • Trading in cryptoassets;
  • Mining;
  • Airdrops; and,
  • Cryptoassets received as earnings.

Am I trading in Cryptoassets?

HMRC note that the substantive conduct and intention of the taxpayer may determine their tax treatment. In particular, an individual may:

“buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.”

Currently, in order to establish whether someone falls into the remit of trading, their activity is assessed against the badges of trade. The relevant badges are,

  • Motive;
  • Frequency and number transactions;
  • Connection with another existing;
  • Whether and how the transactions are financed;
  • Length of the ownership of the cryptoassets;
  • The organisation and sophistication of the operation;
  • Reason for the purchase and/or sale.

Notably, there is no magic number that must be satisfied to amount to trading. Instead, an assessment is undertaken pragmatically in consideration of all of the relevant factors.

If a taxpayer is trading, the profit will be taxable to IT and NI.

Mining

Mining activity is taxable to income tax on either one of two grounds:

  • A taxpayer who has undertaken mining activity will be taxable to IT and NI if their activity falls within the badges of trade detailed above, i.e. if mining activity forms part of an overall trade; or,
  • In the alternative, if the mining does not amount to trading activity, the pound sterling value of the mined cryptoassets will be taxable to income tax as miscellaneous income at the point of mining.

Notably here, if taxable to miscellaneous income, losses are restricted to miscellaneous income only and therefore, if a loss has been made, particularly due to costs from mining, such as electricity, these cannot be offset against any other non-miscellaneous income in that respective tax year.

Cryptoassets are new and unique and therefore, the relative tax treatment is difficult to draw comparisons with other areas of asset taxation. In particular, the taxation of mining activity to miscellaneous income is not comparable to the taxation of any other activity and therefore at face value, HMRC appear to be levying an additional taxable event, without any legislative base. We have previously considered this, in an overview of the 2018 HMRC Guidance, alongside broad examples.

Following the mining of cryptoassets, taxpayers will be subject to one of two paths to taxation, when sold. This will depend upon whether the taxpayer falls within the trading or miscellaneous category.

The taxable paths are as follows:

(1) Mining activity (Trading Income). If a taxpayer was mining as part of a trade, the cryptoassets form part of the trading stock. Their taxable events will be,

  • 1 – Whether the cryptoassets were sold soon after mining, or several years later, the tax effect of this depends upon the treatment of the stock.
    • a – If sold as trading stock, the profits of any sale of cryptoassets will be taxable to income tax (trading income).
    • b – Alternatively, if the stock was instead retained as investment property, there is an additional tax liability that arises at the point where the cryptoasset(s) move(s) from trading stock to investment property. effectively, there will be a self-sale at market value at the point of transferring the cryptoasset from trading stock to an investment property. The profit (or hypothetical profit) will be chargeable to income tax (trading income). One difficulty here is pinpointing the exact point when this occurs and in practice, this is not always clear.
  • 2 – If the cryptoasset is held as investment property, any further taxable event will be chargeable to CGT, as investment property, detailed above.

(2) Mining Activity (Miscellaneous Income).

  • 1 – If a taxpayer had previously mined cryptoasset(s) they will be taxable to miscellaneous income (if not trading) on the pound sterling value at the time of receipt.
  • 2 – If the mined cryptoassets are later disposed of, they may be subject to CGT on the disposal.

Airdrops

An airdrop is the allocation of cryptoassets, which may or may not be in return for something.

An airdrop is taxable to IT if it is received in return for doing something, which includes the expectation or provision of a service. This will be subject to income tax, as either:

  • Trading income (again, also chargeable to NI); or,
  • Miscellaneous income.

An airdrop may not be a taxable event if the transfer is received in a personal capacity, or not received in exchange for something, such as the provision of a service (i.e. work).

Cryptoassets Received as Earnings

Cryptoassets received as employment income are chargeable to IT and NI.

There are two separate categories that apply to the taxation of cryptoassets received by taxpayers. Both result in the taxpayer being taxable to IT and NI, however there are differences in relation to how the tax is administratively collected. The two categories are:

  • Readily Convertible Cryptoassets (RCC); and
  • Non-Readily Convertible Cryptoassets (NRCC).

RCC’s are taxable through PAYE like any other income payment. Therefore, IT and employee NI will be deductible at source by the employer and paid to HMRC on the employee’s behalf based upon the value of the cryptoasset. Similarly, employer NI is also payable.

NRCC’s are not taxable through PAYE and therefore taxpayers will have to register for self-assessment and declare NRCC’s on a self-assessment tax return. However, guidance states that employers should treat these as ‘payments in kind’ and therefore pay any Class 1A NI on the payments.

The above also applies if a third party makes a payment of cryptoassets for earnings on behalf of another individual/company. Tax treatment will depend upon whether the cryptoasset is an RCC or NRCC.

Risk is inherent in cryptoasset activity, but one area where uncertainty should be mitigated is the tax treatment of your crypto transactions.

Taxpayers will be chargeable to CGT on the disposal of cryptoassets in a number of circumstances, these include:

  • Selling cryptoassets for money;
  • Exchanging cryptoassets for a different type of cryptoasset;
  • Using cryptoassets to pay for goods or services; and,
  • Giving away cryptoassets to another person.

The value attached to the cryptoasset on each taxable event, detailed above, is the pound sterling value attributable to the cryptoasset at the point of the taxable event. This may add a level of complexity as not all cryptoassets have a direct pound sterling value. For example, some cryptoassets must be exchanged to another cryptoasset first, in order to realise a fiat currency value, which will then provide a pound sterling value. Therefore, it is advisable that those buying and selling cryptoassets should keep a record of all relevant values at each taxable event, that directly or indirectly give each cryptoasset a pound sterling value.

When calculating whether there is a gain or a loss, the following are allowable costs:

  • The consideration (in pound sterling) originally paid for the asset;
  • Transaction fees paid before the transaction is added to a blockchain;
  • Advertising for a purchaser or a vendor;
  • Professional costs to draw up a contract for the acquisition or disposal of the cryptoassets;
  • Costs of making a valuation or apportionment to be able to calculate gains or losses.

However, the following will not be allowable in calculating whether there is a gain or a loss:

  • Any costs deducted against profits for Income Tax;
  • Costs for mining activities (for example equipment and electricity).

As is applicable for shares, s.104 pooling is applicable, which provides a methodological way to calculate taxable gains.

If a taxable disposal occurs and a loss is made, this may be relievable against any other gains made in the current year or carried forward to relieve future gains.

FAQs

Taxation on cryptoasset – mining, holding, buying, selling

Under HMRC guidance, the activity in question determines the cryptoasset tax treatment and whether liability to Capital Gains, Income tax or Corporation tax has been triggered.

This is consistent with the position on land, property and dealing in shares and other financial instruments, and means the underlying assets are not of primary significance.

HMRC’s guidance provides that a taxpayer will be subject to the following taxes in the following circumstance:

  • Capital Gains Tax – taxed at 10/20% for an individual and corporation tax at 19% for a company. This applies if the property is held as,
    • Investment property.
  • Income Tax – 20/45/45% for an individual, alongside this National Insurance may also be payable if in relation to trading or employment earnings. This applies where the cryptoassets have been,
    • Received as earnings;
    • Mined;
    • Airdropped; or,
    • Traded

Do the cryptoasset activities amount to gambling or highly speculative activity?

In 2014, HMRC guidance stated, if the activity amounted to gambling, or it was so highly speculative, it rendered it non-taxable. However, in the most recent guidance, HMRC expressly rule out the option of gambling and is silent on the possibility of highly speculative activity. Notably, although it is unlikely that someone may fall into either category, the legislative basis for both exemptions still stand, where the specific facts and circumstances support this position.

If either is applicable, this is applies at the basis of a filing position. It is important to note, HMRC retains the prerogative and discretion to challenge this. As such, the assertion that cryptoasset activities are now taxable in all circumstances and expressly ruling out the possibility of gambling, suggests that this is something they would challenge.

Therefore, to avoid any penalties being imposed it is important to make the appropriate disclosure on the relevant tax return.

capital-gains-tax-bitcoin

Are the activities of an investment nature?

In their most recent guidance, HMRC have asserted, the default position is that cryptoassets are treated as investment property, similar to other property, such as shares. As the default position, HMRC suggest that this will be applicable, unless it is classified under another category, such as trading.

Within this status, the gains and losses would fall within the capital gains tax regime. Therefore, any gains will be subject to CGT at either 10% or 20% depending on the level of other income earned by the taxpayer in the year.

They should generally get the Annual Exemption which is £11,700 for 2018/19.

By extension, if gains on your activity are taxable then the corollary is that the losses will be allowable.

Generally speaking, for an individual, a capital loss can be offset against a current year capital gain or carried forward indefinitely.

A question is whether the activities could be an investment business? In other words, something that is more than an investment but less than a trade. In such circumstances, certain business reliefs might be available. HMRC are silent on this in their guidance, however the underlying legislation stands if someone falls within such exemptions.

Tax treatment when trading

There have been no specific cases on whether cryptoasset activity constitutes a trade. The most analogous body of case law relates to whether dealing in shares is an investment or a trading activity. Further, guidance may also be offered from the ‘badges of trade’, which assists in identifying the presence of a trade. Notably, there is no magic number that must be satisfied to amount to trading. Instead, an assessment is undertaken pragmatically in consideration of all of the relevant factors. The relevant badges of trade are,

  • Motive;
  • Frequency and number transactions;
  • Connection with another existing;
  • Whether and how the transactions are financed;
  • Length of the ownership of the cryptoassets;
  • The organisation and sophistication of the operation;
  • Reason for the purchase and/or sale.

If the activities are such that it would constitute a trade, then any profits that arise to an unincorporated business (i.e. sole trader or partnership / LLP) would be subject to income tax. Where activities were run through a company then profits would be subject to corporation tax.

In such instances, it becomes possible to offset revenue expenses – energy, rent on premises and staff costs – and also claim capital allowances on capital items such as computer equipment and other plant and machinery.

Is crypto a currency or an asset?

As a matter of current law, it seems that cryptoassets are not a currency. This is supported by the Cryptoasset Taskforce, HMRC, the Bank of England, the European Central Bank and the Financial Conduct Authority in their adopted definition. Resultingly, emphasis is placed on the name cryptoassets, rather than cryptocurrency.

To illustrate, beyond the conversion of cryptoasset in to fiat currency – such as Bitcoin in to GBP – also relevant will be any gain or loss on the conversion of one type of cryptoasset in to another one, such as Bitcoin into Ethereum, and potentially the investment of currency in to other assets or services on an ICO.

Cryptoasset tax liability for service providers

For service providers engaged in the cryptoasset industry, including professional advisers, there may also be a valid question of tax treatment on their service provision relating to crypto activity. For example, taking payment in cryptoasset, as we do here at ETC.

Largely, these will be treated as any other business under current tax rule, but taking advice will ensure you are taking a tax-efficient approach.

How does domicile and residence impact tax on cryptoasset?

No capital gains tax is payable on the disposal of assets where the individual or entity is non-UK resident, excluding UK residential property and, in the future, UK commercial property.

This is subject to anti-avoidance rules, including the temporary non-residence rule. It is advisable to take professional opinion on your circumstances.

A cryptoasset is likely to be a non-UK asset. As such, a UK resident but non-UK domiciled individual who is a remittance basis user will only pay tax on disposals where the proceeds are brought to, or enjoyed in, the UK.

In addition, for those who meet the relevant conditions then their cryptoasset holdings could benefit from the rebasing provisions, meaning that only gains that have arisen since April 2017 would be subject to tax.

Again, we can advise on the most tax-efficient approach for your circumstances.

Earnings in Cryptoassets

Cryptoassets received as employment income are chargeable to IT and NI.

There are two separate categories that apply to the taxation of cryptoassets received by taxpayers. Both result in the taxpayer being taxable to IT and NI, however there are differences in relation to how the tax is administratively collected. The two categories are:

  • Readily Convertible Cryptoassets (RCC); and
  • Non-Readily Convertible Cryptoassets (NRCC).

 

RCC’s are taxable through PAYE like any other income payment. Therefore, Income Tax and employee National Insurance will be deductible at source by the employer and paid to HMRC on the employee’s behalf based upon the value of the cryptoasset.

NRCC’s are not taxable through PAYE and therefore taxpayers will have to register for self-assessment and declare NRCC’s on a self-assessment tax return. However, guidance states that employers should treat these as ‘payments in kind’ and therefore pay any Class 1A National Insurance on the payments.

The above also applies if a third party makes a payment of cryptoassets for earnings on behalf of another individual/company. Tax treatment will depend upon whether the cryptoasset is an RCC or NRCC.

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ETC Tax is at the frontline of this fast-developing area. We are advising individuals and companies holding and transacting in cryptocurrencies, including Bitcoin, Litecoin, Ethereum, ZCash, Dash, Ripple, among many others.

Whether you are looking to set up a cryptoasset fund or are already actively engaging in cryptoasset activity – buying, selling, holding, mining – we will assess whether your activity falls under the classification for personal, speculative, trade, or investment.

Looking at your specific circumstances, we will analyse the tax treatment of your activities, assessing where chargeable gains or allowable losses arise on your cryptoasset transactions, where you may have generated taxable profit or allowable losses and where exemptions may apply, for example, to transactions considered as ‘highly speculative’.

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For advice on the taxation treatment of your transactions and dealings in cryptoasset, contact us.

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