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UK revises guidance on tax treatment of cryptocurrencies

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HMRC (Her Majesty’s Revenue and Customs authority) has listened to public concerns and published revised guidance setting out the tax authority’s approach to taxing individuals who buy and sell cryptocurrencies confirming that capital gains tax (CGT), income tax and national insurance contributions may apply, reports Accountancy Daily.

HMRC’s updated guidance should help individuals to meet their tax obligations by resolving some of the uncertainties surrounding the tax treatment of cryptoassets. However, the guidance does not ‘explicitly consider the tax treatment of cryptoassets held for the purposes of a business carried on by an individual’.

HMRC first issued guidance on the taxation of cryptocurrencies on 3 March 2014, but it has not been updated since.

In its revised guidance, HMRC confirm that it expects the buying and selling of cryptoassets by individuals will amount to an investment activity and be subject to CGT but says that it is rare that selling will be done on such a scale that it can be considered trading.

If it is considered to be trading, then income tax will take priority over CGT and will be applied to profits or losses.

Cryptoassets are digital and therefore intangible, but count as a ‘chargeable asset’ for CGT if they are both capable of being owned and have a value that can be realised.

To find out whether CGT is chargeable individuals need to calculate their gain or loss when they dispose of their cryptoassets. Disposal 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 donated to charity then CGT is not charged but this does not apply if the individual makes a tainted donation ( where the donor or associated person obtains a financial advantage, directly or indirectly, from the charity which received the donation) or where the individual disposes of the cryptoassets to the charity for more than the acquisition cost so that they realise a gain.

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; and
  • costs of making a valuation or apportionment to be able to calculate gains or losses.

The following do not constitute allowable costs for Capital Gains Tax purposes:

  • any costs deducted against profits for Income Tax; and
  • costs for mining activities (for example equipment and electricity)

Example:

Victoria bought 100 token A for £1,000. A year later Victoria bought a further 50 token A for £125,000. Victoria is treated as having a single pool of 150 of token A and total allowable costs of £126,000.

A few years later Victoria sells 50 of her token A for £300,000. Victoria will be allowed to deduct a proportion of the pooled allowable costs when working out her gain:

  Amount
Consideration £300,000
Less allowable costs£126,000 x (50 / 150)£42,000
Gain £258,000

Victoria will have a gain of £258,000 and she will need to pay Capital Gains Tax on this. After the sale, Victoria will be treated as having a single pool of 100 token A and total allowable costs of £84,000.

If Victoria then sold all 100 of her remaining token A then she can deduct all £84,000 of allowable costs when working out her gain.

An airdrop is where someone receives an allocation of tokens or other cryptoassets, for example as part of a marketing or advertising campaign in which people are selected to receive them.

Income Tax will not always apply to airdropped cryptoassets received in a personal capacity. Income tax may not apply if they are received:

  • without doing anything in return (for example, not related to any service or other conditions); and
  • not as part of a trade or business involving cryptoassets or mining.

Airdrops that are provided in return for, or in expectation of, a service are subject to income tax either as:

  • miscellaneous income; or
  • receipts of an existing trade

The disposal of a cryptoasset received through an airdrop may result in a chargeable gain for CGT even if it is not chargeable to income tax when it is received.

In its guidance HMRC said: ‘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 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.’

Jon Stride, co-chair of the ATT’s Technical Steering Group, said: ‘There remain some unresolved issues, including where a digital token such as cryptoasset can be considered to be located for legal and tax purposes. HMRC have indicated that this is an issue that will be addressed in future updates to the guidance.   

‘While we welcome the revised guidance, HMRC will need to keep updating it in order to keep pace with this rapidly changing field.’

The tax authority has confirmed that it will publish further information about the tax treatment of cryptoasset transactions involving businesses and companies at a later date.

Policy paper: Cryptoassets for individuals is here.