Tax on cryptoassets is a frequently asked question these days due to the massive surge in popularity of Βitcoin. HMRC is to begin collecting data on holdings of cryptocurrencies from taxpayers it suspects of tax evasion and avoidance.
Tax on Cryptoassets for Ιndividuals
In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
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 (see CRYPTO21100)
- – mining, transaction confirmation, or airdrops (see CRYPTO21150, CRYPTO21200 and CRYPTO21250)
As set out in CRYPTO20250 there may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and they will therefore have taxable trading profits. This is likely to be unusual, but in such cases, Income Tax rules would take priority over the Capital Gains Tax rules.
Guidance on record keeping in relation to cryptoassets and tax on cryptoassets is at CRYPTO10400.
If the activity does not amount to trading the activity will be one of investment and Capital Gains Tax will apply, the guidance for which starts at CRYPTO22000.
An individual who is trading may be able to reduce their Income Tax liability by offsetting any losses from their trade against future profits or other income. HMRC’s Losses: HS227 Self Assessment helpsheet has more information (including restrictions that apply).
If profits from activities are taxable as miscellaneous income, losses may be able to be carried forward to later years. For more information on miscellaneous income, see BIM100000.
Many cryptoassets (such as Βitcoin) are traded on exchanges that do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on the Self-Assessment tax return.
If the transaction does not have a pound sterling value (for example if Bitcoin is exchanged for Ripple) an appropriate exchange rate must be established in order to convert the transaction to the pound sterling.
Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. Details of the valuation methodology should be kept.
Cryptoassets will be property for the purposes of Inheritance Tax. The location (also referred to as situs) of assets may need to be determined for non-UK domiciled taxpayers. Guidance on HMRC’s position is at CRYPTO22550.
HMRC does not consider cryptoassets to be currency or money, so they cannot be used to pay a tax relievable pension contribution to an RPS. For more information on RPS contributions see PTM041000.
If cryptoassets are nevertheless effectively put into an RPS (albeit without tax advantage), the consequence is that they become part of the scheme which is subject to the RPS tax rules.
Companies are subject to Corporation Tax on their profits and gains. Corporation Tax also applies to companies that are members of a partnership or a limited liability partnership in respect of their share of the partnership profits and gains.
When calculating their Corporation Tax, companies must take into account all of the exchange token transactions they have carried out (as they would with any other type of asset).
It is important to note that HMRC does not consider any of the current types of cryptoassets to be money or currency.
This means that any Corporation Tax legislation which relates solely to money or currency does not apply to exchange tokens or other types of cryptoasset. For example:
- – the foreign currency rules (section 328 of the Corporation Tax Act 2009)
- – the Disregard Regulations relating to exchange gains and losses (Statutory Instrument 2004/3256)
- – designated currency elections (section 9A of the Corporation Tax Act 2010)
If the activity concerning the exchange token is not a trading activity and is not charged to Corporation Tax in another way (such as the non-trading loan relationship or intangible fixed asset rules at CRYPTO41100 and CRYPTO41150 respectively) then the activity will be the disposal of a capital asset and any gain that arises from the disposal would typically be charged to Corporation Tax as a chargeable gain.
The treatment of chargeable gains is described from CRYPTO41200.
Corporation Tax: Allowable Costs
When a person calculates their gains/losses from the disposal of tokens, not all costs are allowable as a deduction.
Section 38 of the Taxation of Chargeable Gains Act (TCGA) 1992 provides for the types of costs which can be deducted. HMRC’s view is that these include:
- – the consideration (in pound sterling) originally paid for the asset
- – transaction fees paid for having the transaction included on the distributed ledger
- – advertising for a purchaser or a vendor
- – professional costs to draw up a contract for the acquisition or disposal of the tokens
- – costs of making a valuation or apportionment to be able to calculate gains or losses
Any costs deducted against profits for Income Tax, see CG10260, are not allowable as a deduction for Capital Gains Tax.
Costs for mining activities (for example equipment and electricity) do not count toward allowable costs in respect of tokens because they’re not wholly and exclusively to acquire the tokens, and so cannot satisfy the requirements of section 38(1)(a) TCGA 1992.
It may be possible to deduct some of these costs against profits for Income Tax or Corporation Tax purposes. The costs incurred to acquire equipment used for mining may be allowable as a deduction in the disposal of that equipment subject to relevant provisions such as the chattels exemption and the wasting assets exemption.
If the mining amounts to trade for tax purposes the tokens will initially form part of trading stock. If these tokens are transferred out of trading stock, the business will be treated as if they bought them at the value used in trading accounts.
Businesses should use this value as an allowable cost in calculations when they dispose of the tokens. More information can be found in CG69220.