Cryptocurrencies have been around for a number of years now. HMRC first clarified their tax treatment in the UK in 2014, and has recently issued updated guidance.
The first concept to understand is that HMRC regards Bitcoin and other cryptocurrencies as ‘cryptoassets’: they are not taxed in the same way as established currencies. The second key concept is that not all cryptoassets have the same properties as far as tax is concerned. In guidance published in 2018, HMRC had stated that there are three distinct types of cryptoasset:
- Utility tokens
- Security tokens
- Exchange tokens.
On 1 November 2019, HMRC published a Policy Paper setting out its position on taxing transactions undertaken by businesses that involve ‘exchange tokens’, and on 20 December 2019 it published a similar Policy Paper updating its guidance on the tax position of cryptoassets for individuals.
HMRC states that it will address the treatment of utility tokens and security tokens in future guidance, but it has summarised the position as follows:
- Utility tokens provide the holder with access to particular goods or services on a platform, usually using distributed ledger technology. A business or group of businesses will normally issue the tokens and commit to accepting the tokens as payment for the particular goods or services in question.
- Security tokens may provide the holder with particular interests in a business, for example in the nature of debt due by the business or a share of profits in the business.
- Exchange tokens are defined as cryptoassets - a new type of intangible asset intended to be used as a method of payment (ie encompassing ‘cryptocurrencies’ like bitcoin). The value of exchange tokens is based on their use as a means of exchange or investment. Unlike utility or security tokens, they do not provide any rights or access to goods or services.
The remainder of this article deals with aspects relevant to individuals.
Trade, miscellaneous income, or investment?
As with other assets, if you are regularly buying and selling cryptoasset exchange tokens, or receiving cryptoassets or other payments in return for generating new cryptoassets (‘mining’), it is important to question whether the transactions themselves constitute the activities of a trade (ie trading with a view to a profit).
Some of the key factors to consider are: the degree and frequency of activity, the level of organisation, the risk, and the commerciality. If it is concluded that you are engaged in a trade, the receipts and expenses will form part of the calculation of your trading profits. If a transaction involving cryptoasset exchange tokens is undertaken as part of an existing trade, the profits on the transaction will be included as a revenue receipt in respect of that trade. If mining activity does not amount to a trade, the value of any cryptoassets or fees received for successful mining, less allowable expenses, will be taxable as miscellaneous income.
If the activities do not constitute a trade or the receipt of miscellaneous income, then it is likely that the exchange tokens involved will be treated as ‘chargeable assets’ for Capital Gains Tax purposes. In these circumstance, gains or losses are calculated on a disposal of cryptoasset exchange tokens: for example, where tokens are sold for money or used to pay for goods or services.
If an individual gives away cryptoasset exchange tokens to a person, the disposal is deemed to take place at market value. Similarly, exchanging them for other cryptoassets or using them to buy goods or services will also be treated as a disposal for tax purposes.
Certain allowable costs may be deducted when calculating the gain or loss on disposal, including the consideration originally paid for the asset and the valuation costs incurred to be able to calculate gains or losses. HMRC says that (as for shares) the pooling provisions apply to cryptoasset exchange tokens.
In certain circumstances, it may also be possible to claim a loss where the cryptoasset has become of negligible value. However, if an owner loses their private key and can no longer access the cryptoasset, this does not mean it is valueless, and HMRC will not accept a claim for a tax loss.
Cryptoassets received as employment income
HMRC states that cryptoassets received as employment income count as ‘money’s worth’ and are subject to income tax and National Insurance contributions on the value of the asset. The treatment will depend on whether the cryptoassets constitute Readily Convertible Assets (RCAs), which will be the case if trading arrangements exist, or are likely to come into existence.
Cryptoassets provided in the form of RCAs
Exchange tokens like Bitcoin can be exchanged on one or more token exchanges in order to obtain an amount of money. On that basis, it is HMRC’s view that ‘trading arrangements’ exist or are likely to come into existence at the point cryptoassets are received as employment income.
If an employer has a UK tax presence they must deduct and account to HMRC for the income tax and Class 1 National Insurance contributions due under PAYE, based on the best estimate that can reasonably be made of the cryptoasset’s value. If the employer cannot deduct the full amount of income tax due from employment income they must still account to HMRC for the balance within 90 days after the end of the tax year.
Cryptoassets which are not RCAs
Cryptoassets received as earnings from employment, which do not meet the definition of RCAs, are still subject to income tax and National Insurance contributions.
In such cases employers do not have to operate PAYE - the individual must declare and pay HMRC the income tax due, using the employment pages of a Self-Assessment return.
The employer should treat the payment of cryptoassets which are not RCAs as payments in kind for National Insurance contributions purposes, and pay any Class 1A National Insurance contributions to HMRC.
Where are exchange tokens held?
Exchange tokens are intangible (virtual) assets and it is only the owner that can access or use them. Therefore, HMRC says that it does not matter where they were originally ‘mined’ or acquired - exchange tokens are held in the country in which their owner is resident for tax purposes. This means that even if a foreign domiciled individual acquired exchange tokens whilst living in their home country, once that individual is resident in the UK, the exchange tokens will become taxable in the UK if transactions are carried out.
It should be remembered that HMRC’s guidance is based in its interpretation of existing tax laws that were not designed for cryptoassets. Therefore, although it is a helpful steer to their tax treatment, the tax law may evolve over time, as tax disputes over cryptoassets are tested in the law courts.
More on cryptoassets:
Cryptocurrencies: to be or not to be a currency? - that is the question
How cryptoassets are treated for business tax purposes
Introduction to Cyptocurrencies