The tax treatment of cryptoassets – like so much else about cryptocurrencies – keeps changing (some say “evolving”), as does much else about the field. It is still difficult, for example, even to say how many people are exposed to “crypto”, for instance, dabbling in trading bitcoin or using crypto for purchases. One figure offered for the U.K. is about 6 per cent (versus 17 per cent for the U.S.)—but those numbers tend to be based on surveys and to change constantly.
One thing is certain. HMRC intends to tax gains on crypto, and penalties for evading the tax can be severe. Be aware that HMRC is clamping down on exchanges to reveal information about their customers to enforce tax requirements.
In an investment field like crypto, your tax bill at the end of a given year may arrive long after the completion of the transactions being taxed. If in the interim, volatility of the assets has wiped out all or most of your earlier gains, the tax liability is still there.
For the sake of completeness, ‘crypto’ (sometimes called ‘tokens’ or ‘cryptocurrency’) may be described as cryptographically secured digital representations of value or contractual rights. In other words, the value and ownership of crypto exist as a digital record in a ledger, and, for security, those records are encrypted. The value or contractual right can be transferred to another party, stored, and traded electronically.
Categories of crypto defined by HMRC
Although crypto can be used for purchases (sometimes in a delimited context, as you would buy a token for a ride at a funfair), as well as savings and trading, HMRC does not consider crypto assets to be U.K. currency or foreign currency. (Although, confusingly, the government has investigated creating its own official crypto–nicknamed “Britcoin”). For now, HMRC has grouped crypto assets into four categories, each with tax treatment dependent on the nature and use of the token (not its definition). What are these four categories of use?
- Exchange coins (bitcoin is an example) are used to make payments.
- Utility tokens are used by the holder to access a specific good or service (as would a token for an arcade game).
- Security tokens are financial assets like stocks, commodities futures, or options that can be traded to seek a profit (or suffer a loss).
- Stablecoins are pegged (or tethered) to another asset with a more stable value, such as the dollar or gold. Although bitcoins remain the most widely used crypto, their extreme price volatility can be a drawback, hence introducing the newer stablecoins.
Since crypto assets of all kinds are “digital representations”—and encrypted—holders can keep them in a “crypto wallet” for security. That wallet is either custodial (functioning as does a bank for money) or non-custodial. With non-custodial wallets, the crypto is directly owned by the holder unless they lose their private keys. There is no recourse or ‘forgotten password’ option for owners like there is with custodial wallets.
As in trading stocks and many other assets, there is an exchange where people may buy and sell crypto, and there are fees for this trading that affect the individual’s tax position. Given the enormous appeal of crypto trading for those who seek a highly volatile asset with potential for considerable gains – as well, of course, as huge losses – the tax rules for income and capital gains will become of concern to more and more individuals. This also highlights the importance of understanding allowances and deductions. For example, there are different exchange fees; relating to deposits, currency conversions, trading, and withdrawals. These expenses are significant because they can offset profits when tax time comes.
When businesses use crypto, any profits that become revenue to the business will be trading profits. That is true whether the business accepts exchange tokens as a form of payment or is mining bitcoin on computers dedicated to that purpose.
Returns can be viewed as revenue for corporation tax purposes, but if they are not, then HMRC deems rules for chargeable gains to apply. Then, different types of exchange tokens (bitcoin, Ethereum) must be treated separately. As a final note, VAT must be paid even when crypto is used to pay for goods and services.
Considerations for individuals
For individuals who trade crypto assets, a primary distinction will be between capital gains and income, which, of course, are taxed differently. The great majority of those who seek trading profits on a crypto exchange will be seeking capital gains, and the capital gains tax will apply to them. (The reason is that to be categorised as a professional crypto trader, whose profits are taxed as income, involves an amount of activity, such as ‘mining,’ that is not common.)
Individuals holding crypto assets as a personal investment for capital gains, or to use for making certain purchases, will be liable for payment of a Capital Gains Tax (CGT) when they dispose of their crypto assets. ‘Dispose of’ means either selling your crypto asset for real money or trading it on an exchange for another type of coin. Either way, you have closed a transaction, and if there is profit on the disposal, a tax may be due.
Under HMRC rules, there is an annual Capital Gains Tax exemption. Gains up to that amount, therefore, can be sheltered from CGT. You also may claim capital losses on crypto assets, and those losses can offset your capital gains in other assets in the same tax year.
The professional crypto trader
If you are an individual whose activity in crypto is exceptionally high, the income tax may take priority over CGT for treatment of your profits or losses. As with other income tax liability, an individual may offset losses against future profits or other income. Individuals also are liable to pay income tax and contributions to National Insurance on crypto that they receive from their employer as non-cash payment or from mining bitcoin, on transaction confirmations (a transaction recorded and verified in blockchain mining), or airdrops (receiving free tokens as part of a cryptocurrency business’s marketing). Professional traders also pay income tax on the interest they receive on coins that they ‘stake’ (as a way of giving exchanges liquidity). The tax applies even if that interest is paid in other coins.
Therefore, it is the individual taxpayer’s responsibility to maintain records for each crypto asset transaction. Typical information required includes:
- type of crypto asset
- date of the transaction
- purchase or sale
- number of units involved
- value of the transaction in pound sterling (at the date of the transaction)
- the cumulative total of the investment units held
- bank statements and wallet addresses in case these are needed for an enquiry or review.
This is very much like record-keeping for other types of trading–the basics of a given transaction. And that is the message for those with a crypto portfolio: Just as with your shares portfolio, any profit on crypto assets will be liable for tax.
For now, your crypto assets portfolio cannot be held in a tax-efficient savings account (ISA).
DS Burge & Co Accountants are here to help reduce your tax liability
DS Burge & Co. are chartered accountants in Wimbledon and Surbiton who specialise in personal tax advice and offer a range of business and personal services. Among our clients are small businesses, freelancers, sole traders, contractors, landlords, and startup enterprises. In short, anyone in need of advice focused on building personal or business assets in a consistent, efficient way.
We closely track HMRC regulations, governmental schemes, business opportunities and practices, and other developments that affect our clients. In relatively new and evolving fields, such as crypto, we strive to be up-to-date, fully informed, and with an integrated perspective that serves our clients. Your first step in locating the financial advice and services you need is to reach out to us to make an appointment.
Be sure to check back here for information, insights, and updates on how to grow your business and reduce tax liability.