Cryptocurrency has been around for a few years now, with the most well known being Bitcoin, but there are many others such as Litecoins, Ether, Ripple, Ethereum, Zcash, Dash and Monero to name a few.
Cryptocurrency has made headlines again with Facebook recently announcing Project Libra, which is a new type of digital currency designed for the billions of users of Facebook (and Instagram and WhatsApp), which is due to be launched in 2020.
What is Cryptocurrency
Cryptocurrency, or cryptoassets, is/are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.
The Cryptoasset Taskforce report has identified three types of cryptoassets:
Exchange tokens – these are intended to be used as a method of payment and encompasses cryptocurrencies like Bitcoin.
Utility tokens – these provide a holder with access to particular goods or services on a platform using Distributed Ledger Technology (DLT).
Security tokens – these may provide a holder with particular interests in a business, such as in the nature of debt due by a business or a share of profits in a business.
How is cryptocurrency treated for tax?
In this blog we will focus only on the treatment of exchange tokens, as these are by far the most commonly used and understood form of cryptocurrency and are what most people think of when they think of cryptocurrency.
In guidance published in 2018, HMRC stated that they do not consider that the buying and selling of cryptocurrency to be the same as gambling. As a result, any profit made on cryptocurrency will be either subject to capital gains tax or income tax.
Capital Gains Tax
In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets for a gain. If the cryptocurrency is sold for a loss, this will be allowable as a capital loss.
Disposals for these purposes include:
cryptocurrencies that are sold for money
cryptoassets that are exchanged for a different type of cryptoasset
cryptoassets that are used to pay for goods or services
cryptoassets that are given away
If cryptoassets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For Capital Gains Tax purposes the individual is treated as having received that amount of pound sterling even if they did not actually receive anything.
Certain costs can be allowed as a deduction when calculating if there’s a gain or loss, which include:
the consideration (in pound sterling) originally paid for the asset
transaction fees paid before the transaction is added to a blockchain
advertising for a purchaser or a vendor
professional costs to draw up a contract for the acquisition or disposal of the cryptoassets
costs of making a valuation or apportionment to be able to calculate gains or losses
Where cryptocurrency is purchased in tranches and then sold, the cost of the cryptocurrency is pooled in line with the ‘section 104’ rules for shares; each type of cryptocurrency is kept in a ‘pool’. The consideration (in pound sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’.
For example, if a person owns Bitcoin, Ether and Litecoin, they would have three pools and each one would have it’s own ‘pooled allowable cost’ associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.
If some of the tokens from pool are sold, this is considered a ‘part-disposal’. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.
Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool.
Please note there are special rules where cryptocurrency (and shares) is purchased within 30 days of that same type of cryptocurrency is sold.
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.
Individuals will also pay income tax and national insurance contributions on cryptoassets received from mining, transaction confirmation or airdrops. We won’t go into detail on these in this blog.
There may also be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits; HMRC taxes cryptoassets based on what the person holding it does. If the holder is conducting a trade then Income Tax will be applied to their trading profits.
Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business.
Given cryptocurrency and cryptoassets are such new developments, there is a degree of ambiguity regarding the tax treatment due to tax legislation having no consideration of cryptocurrency when the various legislation was enacted. The above provides an introduction to the broad tax treatment of cryptocurrency, but HMRC have said that the tax treatment should be treated on a case-by-case basis.
Please contact us to find out how the above applies in your circumstances.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.