Posted: 09 / 04 / 2024
Cryptocurrencies (Crypto) have garnered significant attention in recent years and with the rise in Crypto investment comes questions as to how the UK taxes these digital assets.
This article provides a simplified overview of some of the key tax implications to consider when transacting in cryptocurrency. If you would like to discuss your crypto portfolio with us in more detail, please reach out to your Sedulo Tax Contact or Omar Majeed for more information.
Taxation of Individuals
- Individuals are subject to capital gains tax (‘CGT’) on any gains arising from the disposal of crypto assets as well as instances where crypto has been exchanged for a different crypto asset, used to pay for goods or services or given away to another person (save for the spousal exemption for individuals).
- HMRC’s view is that deductible costs will include; the amount originally paid for the asset, transaction fees paid for having the transaction included on the distributed ledger and costs of obtaining a valuation to be able to calculate gains or losses and some professional and exchange fees.
- Capital losses arising from the disposal of crypto assets can be set against any capital gain in the year of loss or in future years. A claim must be made to use them.
- Each type of crypto asset is kept in a separate pool (the ‘S104 pool’) and the usual specials , they may be subject to section 104 pooling, with exceptions for ‘bed and breakfasting’ within 30 days.
- It may be that the disposal of cryptocurrencies are subject to the income tax regime rather than the CGT regime. Where there is a high frequency of transactions, HMRC may consider that an individual (or company) is trading in crypto assets. In this scenario, profits are subject to income tax and National Insurance for individuals. To determine whether a trade is being conducted, the badges of trade need to be considered in the same manner as any other self-employed activity.
- Coin mining, staking and other activities related to crypto assets that generate income will be subject to the income tax regime (and trading profits for companies).
- The location of a crypto asset is an important consideration in determining the UK tax implications of dealing in cryptocurrencies. The current position for HMRC is that the location of the asset follows the residence of the individual.
Taxation of Businesses
- As for individuals, businesses engaging in activities involving exchange tokens need to assess whether a trade is being carried out (subject to the Badges of Trade). Where there is a trade, relevant receipts and expenses are included in the calculation of trading profit.
- Companies that account for exchange tokens as intangible assets may be taxed under Corporation Tax rules where the asset has been created or acquired for “use on a continuing basis”.
- Companies that account for exchange tokens as investments are subject to Corporation Tax on gains that arise on disposal. If a company realises a loss on disposal, the resulting capital loss can be offset against an overall gain on capital disposals.
- Deductible costs and pooling rules are the same as above for individuals.
Record Keeping
- Most exchanges trading in cryptocurrencies are able to provide users with a transaction report, providing records of all historic transactions. However please be aware that some exchanges only retain records for short periods of time.
- Ultimately the onus is on the taxpayers for maintaining transaction records for HMRC review.
Stamp Duty Land Tax (SDLT) and Stamp Duty Reserve Tax (SDRT)
- HMRC consider that SDRT will apply if tokens are given as consideration for purchases of ‘chargeable securities’. The same applies for Stamp Duty Land Tax (SDLT) if tokens are given as consideration for a purchase of land.
- HMRC will consider on a case-by-case basis whether a transfer of exchange tokens meets the requirements for Stamp Duty or Stamp Duty Reserve Tax to apply.
Employment Rewards
- If an employer awards crypto assets, they are taxable as employment benefits. If provided by a third party the Disguised remuneration rules at part 7A of ITEPA 2003 may apply.
VAT
The HMRC Cryptoassets manual states:
- VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.
- Exchange tokens received by miners for their mining activities will generally be outside the scope of VAT.
- When exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself.
Further Information
Taxation of cryptocurrency can be complex and is increasingly becoming of interest to HMRC. Care needs to be taken to ensure that individuals and companies report activity accurately and correctly to avoid tax pitfalls.
If you would like to find out more on how Sedulo can help you with your cryptocurrency portfolio, please contact your usual Sedulo Tax contact or get in touch with your local expert for further details.
