For UK traders, investors and businesses dealing with cryptoassets, it is important to understand the complex tax implications for this rapidly evolving sector. For many industry participants, the line between fact and fiction regarding the taxation of cryptoassets is blurred, often leading to confusion.
Having clarity and understanding on the UK’s approach to the taxation of cryptoassets is therefore vital for individuals and businesses to better plan their transactions and strategy, thereby optimising their tax burden.
The UK’s tax authority, HMRC, recognises that there are a number of different types of cryptoassets, and have adopted a taxonomy that aligns closely with the FCA’s regulatory position. However, the tax treatment of cryptoassets is dependent on the nature and use of the assets in question, as opposed to their classification.
To put to rest a common misconception, HMRC does not consider the buying and selling of cryptoassets to be comparable to gambling. Whether a transaction can be properly characterised as gambling will be a question of fact and will instead be considered on a case-by-case basis.
Importantly, HMRC does not consider cryptoassets to be currency, and therefore treats them as a traditional asset for tax purposes. Consequentially, profits made from cryptoasset activities are taxable.
For individuals dealing with cryptoassets, the two main types of tax applicable would be Capital Gains Tax (CGT) and Income Tax.
Capital Gains Tax is essentially a tax on the profit made when an asset that has increased in value has been sold or disposed. It is the gain that is made which tax is applied against, rather than the whole amount that it has been sold for. For example, if you bought Bitcoin at £16,000, and later sold for £25,000, the gain on which tax would be applied would be £9,000.
Disposal of cryptoassets does not just include selling the cryptoasset for fiat, but also trading it for another cryptoasset, spending it on goods or services, or gifting it.
There is also an annual tax-free allowance, for such instances. For the 22/23 tax year, this allowance is £12,300, and for 23/24 it is £6,000. This means that gains up to the amount of the annual allowance are not subject to any CGT.
If the profits exceed this amount, then CGT will be payable on the amount above the tax-free allowance, with the rate payable depending on your taxable income.
In some instances, cryptoassets, and activities relating to them, can be treated as income in nature; for example, payment for services with cryptoassets, receiving cryptoassets as employee remuneration, or earning cryptoassets from mining or staking activities.
In other circumstances, trading cryptoassets may also be subject to income tax, especially if the trading activity is particularly frequent and regular. Again, whether an individual’s trading activity would constitute treatment as income for taxation purposes will be highly fact dependent and assessed on a case-by-case basis.
Cryptoassets received by an airdrop might also be liable for income tax if the individual has taken an action in exchange for the airdrop, for example promoting or moderating the socials for a particular project.
In relation to mining or staking taxes, if the activity is professional in nature profits may be subject to income tax under trading income rules. If the activity is more casual, it would likely be subject to income tax as miscellaneous income.
If cryptoassets are mined, then the amount of tax will be based on the value of the cryptoasset at the time it was mined. If the mined cryptoasset is later sold and its value has increased, there may also be CGT applicable on the profit made from the increase in value.
The rate of income tax payable would be dependent on the individual’s income for the particular tax year.
It is therefore important to keep detailed records of cryptoasset transactions, as it is possible to reduce the gain, and therefore the tax burden, by deducting allowable costs such as transaction fees.
For businesses engaged in cryptoasset activity, the tax treatment would depend on the nature of activities and transactions. A business involved in cryptoasset activity may be liable to pay a number of different taxes such as CGT, Corporation Tax, Income Tax, VAT, and Digital Services Tax. For example, if a business’s primary function is the trading of cryptoassets, then profit and losses will be subject to corporation tax at the applicable rate.
The tax treatment of businesses will depend on the particular facts of its activities, and will take into account a range of factors.
If the private key to a cryptoasset wallet is lost, HMRC does not view this as a disposal of the asset. Whilst you may have lost access to the cryptoassets within the wallet, you still technically own the assets.
However, in situations where there’s no realistic chance of recovering the cryptoassets, it may be possible to file a negligible value claim and seek relief for a capital loss.
Gifting cryptoassets is viewed by HMRC as a disposal, and therefore will attract a tax liability in the form of CGT. In other words, you would be subject to CGT on the difference between what you originally paid for the cryptoasset and its market value at the time it was gifted.
However, there are advantageous carve-outs when it comes to gifting cryptoassets to your spouse or civil partner, as transfers between spouses/civil partners are not usually subject to CGT at the time of the gift.
Rather, the recipient takes on the original cost basis and will then be liable for any CGT if they later sell or dispose of the cryptoassets.
Taxation and cryptoassets can be a complex and nuanced area, with many considerations, and failure to report crypto gains or losses could lead to penalties and interest charges on unpaid tax liabilities.
It is therefore important to note that, although the nature of cryptoassets and the decentralised framework in which they operate allows for pseudonymity, HMRC has invested significant time and effort to ensure cryptoasset tax compliance.
HMRC has been known to request customer information from centralised exchanges, and also utilises technology and analytics to analyse data and transactions which can establish connections between cryptoasset wallets and transactions and the individuals behind them.
With this in mind, it is imperative that individuals engaged in the crypto sector seek professional advice to ensure that tax liability is calculated correctly and is optimised in line with their strategy and objectives.