What are cryptoassets and how are they treated for tax purposes?
Following HM Revenue & Customs’ (HMRC) recently published manual on cryptoassets, Stephen Kenny from Blick Rothenberg’s Financial Services team provides guidance on what they are, how they’re used and how they’re treated for tax purposes.
What are cryptoassets?
Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically
All cryptoassets use Distributed Ledger Technology – a digital system that records the details of the transactions in multiple places at the same time. The ledger acts as an immutable record of all the transactions that have happened previously.
What are the main types of cryptoassets?
The main types of cryptoassets are:
Exchange tokens – These are the most common sort of token, including bitcoin. They are intended to be used as a form of payment but have become increasingly common as an investment.
Utility tokens – These provide the holder with access to particular goods or services on a platform. Utility tokens can also be traded in the same away as exchange tokens.
Security tokens – These provide the holder with particular rights or interest in a business. ie ownership, repayment of a specific sum of money or entitlement to a share in future profits.
Stablecoins – These are linked to assets that are considered to have a stable value, such as a government currency or gold. The intention is to reduce volatility.
How are cryptoassets treated?
While the tax treatment of all types of token is dependent on the nature and use of the tax token in general, there are some who argue that dealing in cryptoassets is gambling. According to HMRC’s recent guidance, however, this is not the case.
Cryptoassets are intangible assets and in most circumstances, trading will be subject to Capital Gains Tax (CGT) for individuals. Therefore, only in exceptional circumstances would an individual be considered to be ‘trading’, as the level of activity and structuring would have to amount to a financial trade in itself.
As a fungible (mutually interchangeable) asset the calculation of gains/losses on cryptoassets will have to be done on a pooled basis (and have been acquired at their average price).
It is important to note that HMRC do not consider cryptoassets to be currency or money. This means that the useful exemptions for foreign currency bank accounts do not apply to cryptoassets and in practice all transaction in cryptoassets will be chargeable, meaning CGT could potentially arise on transactions between different cryptoassets being used to pay for goods and services.
This makes the calculations potentially very complex and the onus will be on the individual to keep sufficient records for each transaction. These would have to include:
- the type of cryptoasset
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in pounds sterling (as at the date of the transaction)
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review
Further, as cryptoassets are intangible, it is necessary to consider their location. This is going to be particularly relevant for non-domiciled UK-resident taxpayers.
The location will depend on whether the cryptoassets are distinct from any underlying assets. Where the cryptoasset is distinct from any underlying asset the location would be determined by the residency of the beneficial owner. In practice this means that where the cryptoasset is held by a UK-resident taxpayer they will be liable for CGT and would not be able to benefit from the remittance basis.
As such, it is important for individuals trading in cryptoassets to take seek professional advice when calculating the capital gains. In calculating the gains, it is also necessary to consider the expenses that have been incurred such as exchange fees.
What are the tax issues presented by cryptoassets?
As a digital asset they are stored in ‘wallets’. What happens if the individual loses access to their wallet? They still own the cryptoasset, but are unable to access them. HMRC have accepted where an individual can show they have no prospect of recovering access it would be possible to make a negligible value claim.
Also, there can be a number of transactions that would affect the tax position of the cryptoasset that would need to be considered such as: where a blockchain forks (i.e. splits into two distribution ledgers) or airdrop (receiving cryptoassets as part of marketing or advertising campaign).
If an individual is involved with staking (verifying transactions) and mining (verifying additions to the blockchain), these are going to be taxable as Income Tax. Whether they are treated as miscellaneous income or trading will depend on:
- degree of activity
If the individual keeps the awarded assets there would be CGT to pay on the growth.
As cryptoassets continue to become more widely used it is necessary to seek professional tax advice on the treatment of these assets. Beyond the basic position, there are a number of other tax implications, including:
- treatment of remuneration in cryptoassets
- the Inheritance treatment of cryptoassets
- the Stamp Duty treatment
- the treatment of cryptoassets for corporates
If you have any questions on, or are unsure of the tax treatment of cryptoassets, or would like to discuss your specific circumstances, please contact Stephen Kenny.