UK and International Tax news

HMRC Publishes Update On Tax Treatment Of Cryptoassets

Wednesday 9th January 2019

HMRC has published updated guidance on how individuals who have cryptoassets are taxed, based on its view of the law as it stands.

Cryptoassets are a relatively new type of asset that have become more prevalent in recent years. New technology has led to cryptoassets being created in a wide range of forms and for various different uses.

HMRC’s latest guidance covers how individuals who have cryptoassets are taxed. It does not explicitly consider the tax treatment of cryptoassets held for the purposes of a business carried on by an individual.

The cryptoassets sector is fast-moving and developing all the time. The terminology, types of coins, tokens and transactions can vary. The tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used. As such, HMRC has stated that it will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place (rather than by reference to terminology). Our views may evolve further as the sector develops.

Where HMRC considers that there is, or may have been, avoidance of tax, the analysis presented will not necessarily apply.

Cryptoassets (including ‘cryptocurrency’ are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically. While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.

HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out in the October 2018 Cryptoasset Taskforce Report, which identified three types of cryptoassets – exchange tokens, utility tokens and security tokens. The tax treatment of each type of token is dependent on the nature and use of the token and not the definition of the token.

HMRC’s guidance considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens. For utility and security tokens HMRC’s guidance sets out the starting principles but a different tax treatment may need to be adopted.

In the vast majority of cases, HMRC expects individuals to hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases, in which cases they will be liable to pay CGT when they dispose of their cryptoassets.

Individuals however will be liable to pay income tax and national insurance contributions on cryptoassets received from their employer as a form of non-cash payment, mining, transaction confirmation or airdrops.

HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.

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 CGT and will apply to profits or losses as it would be considered as a business.

As with any activity, the question whether cryptoasset activities amount to trading depends on a number of factors and the individual circumstances. Whether an individual is engaged in a financial trade through the activity of buying and selling cryptoassets will ultimately be a question of fact. It is often the case that individuals and companies entering into transactions consisting of buying and selling cryptoassets will describe them as ‘trades’. However, HMRC consider the use of the term ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes.

A trade in cryptoassets would be similar in nature to a trade in shares, securities and other financial products. Therefore, the approach to be taken in determining whether a trade is being conducted or not would also be similar, and guidance can be drawn from the existing case law on trading in shares and securities.

HMRC’s guidance provides detail on the CGT treatment of cryptoasset transactions, disposals, allowable costs, pooling under s.104 TCGA 92, and where cryptoassets are received as earnings.

HMRC will publish further information about the tax treatment of cryptoasset transactions involving businesses and companies in due course.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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