Taxing Cryptoassets

Cryptoassets continue to grow rapidly amongst investors and, with more high-profile cryptocurrencies on the horizon (such as Facebook’s Libra), the tax treatment as well as what records need to be kept is becoming increasingly important.

Mark Richdon breaks down HMRC’s updated guidance published on 1 November 2019 into questions and answers, following the previous article last year on the sector.

What is a cryptoasset according to HMRC?

HMRC make it very clear that cryptoassets are not considered to be currency or money.

They have identified three different types of cryptoassets:

• Exchange tokens (such as bitcoin, where the holder uses the token as a method of payment and has no rights to goods, services or an interest in a business);
• Utility tokens (where the holder is allowed access to a good or service); and
• Security tokens (where the holder is entitled to an interest in a business).

HMRC’s guidance focuses on exchange tokens only, with further guidance promised for the other two shortly.

Am I, my business or my company trading in cryptoassets?

Firstly, HMRC have clarified their statement made in their brief 2014 publication that the buying and selling of cryptoassets is not considered to be the same as gambling – so any income or gains will be subject to tax.

Whether you, your business or your company are trading is based on a number of factors:

• Degree and frequency of activity;
• Level of organisation;
• Risk; and
• Commerciality.

In HMRC’s view, only in exceptional circumstances is it expected that individuals will buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity is deemed a trade.

VAT should also be considered and is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens. The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place. There are specific VAT rules for miners and the supply of exchange tokens.

What if I’m involved in mining cryptoassets?

Where cryptoassets are awarded to ‘miners’, it is more likely to be regarded as trading but, depends on the same factors.

For example, using a home computer while it has spare capacity to mine tokens would not normally amount to a trade. However, purchasing a bank of dedicated computers to mine tokens for an expected net profit (taking account of the cost of equipment and electricity) would probably constitute trading activity.

If mining activity is not a trade, any award of cryptoassets is taxable as miscellaneous income with appropriate expenses reducing the amount chargeable.

If the miner keeps the awarded cryptoassets, they may have to pay Capital Gains Tax or Corporation Tax on chargeable gains when they later dispose of them.

I’ve received an airdrop - what is it and what taxes do I have to pay?

An ‘airdrop’ is when someone receives an allocation of cryptoassets, for example when tokens are given as part of a marketing campaign or given automatically because you already hold a certain number of tokens.

Income Tax will not always apply to individuals and is dependent on whether it is in return for a service. The disposal of a cryptoasset received through an airdrop may result in a chargeable gain for Capital Gains Tax.

If me, my business or my company is not trading, what taxes will apply?

If there is no trading activity, and no income is charged to Income Tax or Corporation Tax as trading or miscellaneous income, then the activity will be the disposal of a capital asset and any gain that arises from a disposal would typically be charged to Capital Gains Tax or Corporation Tax as a chargeable gain.

How do I calculate a cryptoasset chargeable gain or loss?

A chargeable gain or loss is the disposal value, or market value in some circumstances, minus any allowable costs (such as acquisition costs or transaction fees).

Calculating a chargeable gain or loss has to be done when a disposal takes place, i.e.:

• When a cryptoasset is sold for money
• When a cryptoasset is exchanged for a different type of cryptoassets
• When using cryptoassets to pay for goods or services
• When giving away cryptoassets to another person or company (that isn’t a spouse or civil partner; or a company in the same group)

Rather than having to track the gain or loss for each transaction individually, HMRC make the chargeable gain or loss calculation simpler by pooling each type of cryptoasset.

What if my cryptoasset has become worthless?

As with other types of assets, individuals may be able to crystallise losses for cryptoassets that they still own if they become worthless or of ‘negligible value’, provided certain conditions are met.

A negligible value claim treats the cryptoasset as being disposed of and re-acquired at the worthless value, crystallising a loss at that time.

What if I am defrauded or lose my private key?

HMRC do not treat the misplacing of a private key as a disposal for capital gains tax purposes. If it can be shown that there is no prospect of recovering the private key, HMRC do allow a negligible value claim to be made so a loss can be crystalised.

HMRC does not consider a theft to be a disposal and the victim cannot claim a loss for capital gains tax purposes however, there may be exceptional circumstances where a negligible value claim can be made.

Is stamp duty chargeable on my cryptoassets?

HMRC’s view is that existing exchange tokens would not likely meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’, so no stamp duty is due when they are bought or sold.

However, if exchange tokens are given as consideration (e.g. for a land transaction) this may count as ‘money’s worth’ and so be chargeable for Stamp Duty based on the sterling value.

What if I’m paid in cryptoassets?

Cryptoassets received as employment income count as ‘money’s worth’ and are subject to income tax and national insurance contributions. Where the cryptoasset can be exchanged to obtain an amount of money, income tax and national insurance contributions must be deducted through PAYE based on the best estimate that can reasonably be made of the cryptoasset’s value.

Any disposal of cryptoassets received through employment may be subject to Capital Gains Tax.

What records do HMRC expect me, my business or my company to keep?

Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.

The onus is therefore on the taxpayer to keep separate records for each cryptoasset transaction, and these must include:

• the type of cryptoassets
• 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

Many cryptoassets are traded on exchanges which do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on an individual’s Self-Assessment tax return. Reasonable care should be taken to arrive at an appropriate valuation for each transaction using a consistent methodology, which should also be kept.

A company may make an election to designate a non-sterling currency as its functional currency. In these circumstances the cryptoassets need to be converted to the functional currency and, at the end of the accounting period, the necessary steps will need to be completed to complete the tax return in pounds sterling.

This is a fast-moving sector for investors, professionals and HMRC alike. The guidance and HMRC’s views may evolve further as the sector develops so, if you would like any assistance with your cryptoasset activity, or for more information, please contact a member of our tax team.