Cryptoassets: What are they and what are the tax implications?
Research suggests that some 2.3m adults in the UK now hold cryptoassets – or as they are also called cryptocurrency, crypto tokens or just “crypto”. Since 2020 that figure has increased by more than 400,000, with more and more of us investing in cryptocurrencies.
Reportedly, UK cryptocurrency investors are typically men aged over 35 in professional or managerial jobs, holding an average of about £300 of cryptocurrency. That’s a relatively small investment, but it’s increasing each year (in 2020 the average was £260).
About two thirds of UK cryptocurrency investors have invested in Bitcoin, which was launched in 2009 and is the world’s biggest and best-known example. But other popular cryptocurrencies include Ethereum, Litecoin, Ripple, Bitcoin Cash and Bitcoin SV. GoSimpleTax discusses cryptocurrencies and how HMRC views them below.
So, what is a “cryptocurrency”?
Cryptocurrencies are digital assets. According to HMRC: “Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be transferred, stored [and/or] traded electronically.”
You can’t spend cryptocurrencies in the shops and they have no inherent value; their value is determined only by how much someone is prepared to buy them for. Cryptocurrencies are bought and sold via a peer-to-peer online network. Their value can go up or down, which can make them a good or bad investment.
The word “crypto” means secret or concealed, which goes some way to explaining the concept of cryptocurrencies, of which there are now thousands. Secure encryption of data and communication is key to cryptocurrencies.
Cryptocurrencies are decentralised open networks. Unlike more familiar currencies, they’re not managed or controlled by government or a central authority such as the Bank of England or the US Federal Reserve. Ownership data is stored and shared via ‘Distributed Ledger Technology’ (ie an online/digital database which lists transactions). Anyone anywhere can send and receive payments and transactions, without the need for verification from a bank. Investors keep their cryptocurrencies in a digital wallet and can buy and sell at will.
How does HMRC view cryptocurrencies?
If you’re considering investing in one or more cryptocurrencies, naturally you’ll wonder about the tax implications.
As explained on government website GOV.uk: “HMRC does not consider cryptoassets to be currency or money. On its own, owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activities.”
Moreover: “The tax treatment of all types of cryptocurrency depends on its nature and use – not its definition.”
Cryptoassets and tax – individuals
People buy cryptocurrencies either hoping their investment will grow over time or to make certain purchases. That’s why they’re required to pay Capital Gains Tax if they sell cryptocurrency tokens, exchange them, use them to pay for good or services, give them away or even donate them to charity. You can claim a CGT allowance and some allowable expenses are deductable. GOV.uk explains the cryptoasset records you must keep and how to report them.
You must pay Income Tax and National Insurance contributions (NICs) on cryptoassets if you receive them from your employer as a non-cash bonus/benefit/payment.
If HMRC believes that you’re trading in cryptocurrencies rather than occasionally investing, you’ll be expected to pay Income Tax rather than Capital Gains Tax. There can also be implications relating to Stamp Duty, Inheritance Tax and pension contributions.
Many cryptoassets are traded on exchanges that don’t use UK currency pounds sterling, so the value of any gain or loss you make must be converted into pounds when completing your Self-Assessment tax return.
Further tax guidance for individuals regarding cryptocurrencies is available on GOV.uk.
Cryptoassets and tax – businesses
Businesses that buy or sell cryptocurrency (tokens or a denomination of a cryptocurrency), exchange them for other assets (including other cryptoassets) or provide goods or services in return for tokens, are liable for tax, whether Capital Gains Tax, Corporation Tax, Corporation Tax on Chargeable Gains, Income Tax, National Insurance contributions, Stamp Taxes and/or VAT.
The amount of tax the business must pay on cryptocurrency is determined by its turnover, costs, profits and gains. Obviously, these are declared each year to HMRC via Self Assessment for sole trader businesses and Corporation Tax returns for limited companies.
As stated on GOV.uk: “Generally, for Income Tax or Corporation Tax, profits from a trade involving cryptoassets must be calculated in accordance with Generally Accepted Accounting Practice, subject to any adjustment required or authorised by law.
“HMRC will consider each case on its own facts and circumstances. It will apply the relevant legislation and case law to determine the correct tax treatment (including where relevant, the contractual terms regulating the exchange tokens).”
If your cryptoassets are traded on exchanges that don’t use pounds sterling, the value of any gain or loss you make must be expressed in pounds sterling when completing your tax returns.
Tax and cryptoassets: looking ahead
According to HMRC, how cryptoassets are taxed will continue to develop as a result of the ever-evolving nature of the technology used and the areas in which cryptoassets are used. “As such, the facts of each case need to be established before applying the relevant tax provisions according to what has actually taken place (rather than by reference to terminology). Our views may evolve further as the sector develops and HMRC may publish amended or supplementary guidance accordingly.”
For more information visit the government website GOV.uk to download HMRC’s Cryptoassets Manual, which provides more detail on taxation of cryptoassets.