The most recent update by HMRC was in December 2019, which provided further guidance concerning the tax treatment of crypto assets for individuals and also detailed how to determine the location of the property (mainly for non-domiciled individuals).
First and foremost, it would be beneficial to define cryptoassets – and they are defined by HMRC as “cryptographically secured digital representations of value or contractual rights that can be transferred; stored; and traded electronically”.
HMRC have identified three types of crypto assets:
Exchange tokens: These are to be used as a method of payment similar to cash and card. Bitcoin is regarded as an exchange token. The value of an exchange token is based on its means of exchange or investment.
Utility tokens: These provide the holder with access to particular goods or services on a platform. Businesses usually issue tokens and commit to accepting them for particular goods or services.
Security tokens: These may provide the holder with particular interests in a business, similar to shares or debentures/bonds.
For the avoidance of doubt, HMRC does not consider crypto assets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report which was released in 2018.
How crypto assets are treated for UK tax purposes depends on a number of issues and HMRC’s guidance covers some of the areas of complexity.
Whether the taxpayer is actively trading in crypto assets – where the hallmarks of ‘trading’ are met (i.e. Badges of Trade) – the trading profit or loss would be subject to income tax.
Mining, which generates new crypto assets (for verifying additions to the digital ledger) may be taxable as income if the badges of trade are again met. However, if the mining activity does not amount to a trade, any crypto assets awarded for successful mining will be taxable as income. Mining fees are also considered to be income for UK tax purposes.
If an individual receives crypto assets in lieu of salary (or benefits relating to employment), the amounts received would be subject to income tax and National Insurance (when received).
Capital Gains Tax (CGT)
The vast majority of individuals are likely to hold crypto assets as an investment. Therefore, CGT would be payable if a gain is generated upon disposal. However, if a loss arises this can be set against other gains in the same year or carried forward to utilise against future gains.
In the context of CGT a ‘disposal’ is a broad concept and includes: selling crypto assets for money; exchanging crypto assets for a different type of crypto asset; using crypto assets to pay for goods or services; and giving away crypto assets to another person
It is essential that individuals understand when a disposal occurs so that the correct information can be reported to HMRC.
Residency and Cryptoassets
For non-domiciled individuals (that are perhaps claiming the remittance basis and therefore only taxable on income arising from UK sources), the location of their crypto assets will be important given the potential for significant levels of income and gains.
HMRC has confirmed that when an individual is resident in the UK, the crypto assets they hold as beneficial owner will be located in the UK. Any income/gains arising will therefore be subject to UK tax and considered to be UK sourced income.
Gambling and Cryptoassets
When the initial paper was released in 2014, it was understood that crypto assets could be regarded as speculative and as such would be considered as gambling. This was favourable because from a UK tax perspective, winnings from gambling/betting are exempt from tax. However, HMRC do not consider the purchase and sale of crypto assets to be gambling.
Scott Reid is Assistant Tax Manager at Turcan Connell