UK tax authority HM Revenue and Customs recently released in-depth guidance on how individuals who own "cryptoassets" should be taxed, focusing specifically on virtual currencies. This guidance is summarised in today's article.
What Is A Cryptoasset?
Cryptoassets are more commonly referred to as cryptocurrenices. Typically, they are cryptographically-secured digital representations of value or contractual rights that can be:
- traded electronically
While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets. HMRC does not consider cryptoassets to be currency or money, in line with the position previously set out by the Cryptoasset Taskforce report (CATF). The CATF have identified three types of cryptoassets:
- exchange tokens
- utility tokens
- security tokens
Introducing the guidance, HMRC noted:
The cryptoassets sector is fast-moving and developing all the time. The terminology, types of coins, tokens, and transactions can vary. The tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used. As such, HMRC will look at the facts of each case and apply the relevant tax provisions according the what has actually taken place (rather than by reference to terminology). Our views may evolve further as the sector develops.
According to the guidance, the tax treatment of all types of tokens is dependent on the nature and use of the token, and not the definition of the token. The guidance focuses only on exchange tokens – like virtual currencies, such as bitcoin – and does not specifically consider utility or security tokens. The guidance instead sets out starting principles that may be relevant for those seeking to understand HMRC's policy on utility and security tokens.
The guidance notes that, in the vast majority of cases, individuals hold cryptoassets as a personal investment – usually for capital appreciation in its value or to make particular purchases. This therefore brings about liability to capital gains tax, when taxpayers dispose of their cryptoassets.
However, individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from: their employer as a form of non-cash payment; or from mining, transaction confirmation, or airdrops.
Individuals trading in cryptoassets as a business activity will generate taxable trading profits. HMRC says, while this is likely to be unusual, income tax would take priority over the capital gains tax rules. HMRC intends to publish separate information for businesses in due course. The department added that it does not consider the buying and selling of cryptoassets to be the same as gambling.
The guidance sets out in detail the income tax consequences of trading in virtual currencies, as well as rules surrounding tax losses; the capital gains tax consequences of investing in virtual currencies, including rules on pooling (the simplified system of calculating capital gains tax); the tax rules on mining activities (the process through which virtual currencies are created); the rules on airdrops (token donations or gifts); charitable donations of virtual currencies; guidance on blockchain forks; the loss of public and private keys, or loss as a result of fraud; and rules where virtual currencies are used to pay employees.
- Ireland Issues Guidance on Taxation of Cryptocurrencies & Crowdfunding
- Tax & Blockchain - The New Paradigm In Tax Administration
- Rise Of The Netflix Tax - VAT On Digital Supplies
HMRC stressed that the onus is on the individual to keep separate records for each cryptoasset transaction, and these must include:
• the type of cryptoasset;
• date of the transaction;
• if they were bought or sold;
• number of units;
• value of the transaction in pound sterling;
• cumulative total of the investment units held;
• bank statements and wallet addresses, if needed for an enquiry or review.