Cryptoassets – tax treatment update for individuals
Read on to get a better understanding of the ever changing tax rules relating to cryptoassets.
Cryptoassets are a relatively new type of asset that have become more well known and publicised in recent years. New technology has led to cryptoassets being created in a wide range of forms and for various different uses.
You may have heard of the terms Bitcoins, Altcoins or Tokens – these are the three main types of cryptoassets (or ‘cryptocurrency’ as they are also known) that are cryptographically secured digital representations of value or contractual rights that can be:
• traded electronically
While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets. Blockchain is probably the best know example of DLT.
HMRC do not consider cryptoassets to be currency or money. They have identified three types of cryptoassets:
• exchange tokens
• utility tokens
• security tokens
However, the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.
In most 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.
Individuals will be liable to pay income tax and National Insurance Contributions (NICs) on cryptoassets which they receive from:
• an employer as a form of non-cash payment;
• mining, transaction confirmation or airdrops.
There may 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. This is likely to be unusual, but in such cases income tax would take priority over the capital gains tax rules.
HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.
Income Tax treatment
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.
Capital Gains Tax treatment
HMRC generally treat the buying and selling of cryptoassets by an individual as an investment activity rather than a trade. This means that if an individual invests in cryptoassets they will typically have to pay capital gains tax on any gains they realise.
Cryptoassets count as a ‘chargeable asset’ for capital gains tax if they are:
• capable of being owned; and
• have a value that can be realised.
Individuals need to calculate their gain or loss when they dispose of their cryptoassets.
A ‘disposal’ is a broad concept and includes:
• selling cryptoassets for money
• exchanging cryptoassets for a different type of cryptoasset
• using cryptoassets to pay for goods or services
• giving away cryptoassets to another person
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 CGT 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
The following do not constitute allowable costs for CGT purposes:
any costs deducted against profits for income tax
costs for mining activities (for example equipment and electricity)
Costs for mining activities do not count toward allowable costs because they’re not wholly and exclusively to acquire the cryptoassets, and so cannot satisfy the requirements of TCGA 1992, s 38(1)(a) (but it is possible to deduct some of these costs against profits for income tax or on a disposal of the mining equipment itself).
Pooling allows for simpler CGT calculations.
Pooling applies to shares and securities of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”.
HMRC believe cryptoassets fall within this description, meaning they must be pooled.
Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset 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, Ethereum and Litecoin they would have three pools and each one would have its 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 a 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.
The above is a reproduction and condensed version of HMRCs own advice so as to avoid error.
As you can imagine, the taxation of cryptoassets is a complicated area and one where the rules and guidance appears to be changing year on year as the technology and understanding improves.
Landi Accounting have an understanding of cryptoassets and as such would recommend that you get in touch for advice relating to the buying and selling of and cryptocurrencies.