When buying and selling cryptoassets how do you treat the sales for tax purposes? What is HMRC’s latest view, and is there a problem if you are a remittance basis user?
Popularity
The popularity of cryptoassets , cryptocurrency in particular, is hard to deny. It’s estimated that approximately 2.3 million people in the UK own cryptocurrency. Slowly but surely, that figure seems set to rise.
Tax treatment
HMRC’s Cryptoassets Manual outlines how it seeks to tax cryptoassets, which include cryptocurrency.
As cryptoasset taxation is an evolving area, the manual continues to be updated, and now covers cryptoasset taxation for individuals and businesses, as well as decentralised finance (DeFi). This article outlines HMRC guidance as it applies to individuals, excluding DeFi transactions.
Pro advice. The HMRC manual is guidance only, it is not law. It is nevertheless useful to understand how HMRC would seek to tax individuals and businesses with cryptoassets.
Gain or income?
The default position is that cryptoassets are considered a personal investment, meaning that you are liable to capital gains tax (CGT) when you sell or otherwise dispose of your cryptocurrency. This default position may change if HMRC suspects tax avoidance.
HMRC doesn’t consider cryptocurrecy to be actual currency or money (which is not a chargeable asset in and of itself). Neither does it accept that buying and selling cryptocurrency is exempt as “gambling”.
Pro advice. The gambling exemption may apply if you are using a platform to bet on the movement of the cryptoassets , rather than actually holding the underlying asset directly, e.g. via a spread betting site.
There are, of course, exceptions to the presumption that cryptocurrency is a CGT asset.
For example, an individual may be subject to income tax and NI on cryptocurrency received from their employer as a form of non-cash payment, or where an individual is mining coins.
In very specific circumstances, you may be carrying on a financial trade in cryptoassets, and so would be subject to income tax on your profits. However, this is exceptional. The threshold for trading activity is similar to that applied when considering if an individual has a trade in share dealing. In this article, we assume that the income tax provisions do not apply.
Pro advice. The fact that the purchase or sale of a cryptocurrency may be described as a “trade” within the industry does not, for tax purposes, mean that activity amounts to a trade.
What counts as a disposal?
HMRC notes that whether there has been a disposal of cryptoassets is a broad concept but includes events such as:
- selling tokens for money
- exchanging tokens for a different type of token
- using tokens to pay for goods or services; or
- giving away tokens to another person (unless nil gain/nil loss treatment applies).
Pro advice. This means that using cryptocurrency to purchase an item can amount to a disposal for CGT purposes.
There are instances where there is no CGT disposal. For example, if you move your tokens between “wallets” there is no disposal, as you retain beneficial ownership of the tokens.
Pro advice. HMRC outlines key terms relating to cryptoassets at CRYPTO10000.
Allowable expenditure
If there has been a disposal of tokens, certain costs can be deducted, as set out in s.38 Taxation of Chargeable Gains Act 1992 (TCGA) . HMRC’s view is that such costs can include:
- the GBP consideration originally paid for the asset
- transaction fees paid for having the transaction included on the distributed ledger
- advertising for a purchaser or a vendor
- professional costs to draw up a contract for the acquisition or disposal of the tokens
Pro advice. HMRC has specific views on whether certain exchange fees are allowable under s.38 , see CRYPTO22150 for a summary table.
Pro advice. Cryptoassets are subject to the pooling requirements outlined in s.104 TCGA , and you will also need to consider if the “bed and breakfasting” rules apply on disposal.
Location
One of the most difficult aspects of taxing cryptoassets, namely exchange tokens, is determining their situs. Given that cryptoassets are digital, identifying their location can have significant implications, for example, where a client uses the remittance basis of taxation.
HMRC’s view is that, where a cryptoasset is a digital representation of an underlying asset, the location of the underlying asset will determine the location of the cryptoasset, per s.275 TCGA.
Where there is no underlying asset, HMRC takes the view that none of the statutory rules apply. In short, HMRC’s view (with respect to exchange tokens) is that the location of the cryptoasset is determined by the residency of the beneficial owner.
So, if a client is UK tax resident, HMRC can deem them liable to UK tax. This analysis applies even if that client is taxed on the remittance basis.
Pro advice. Remittance basis individuals may not be expecting this position from HMRC. They should be informed that HMRC will likely consider their cryptocurrency transactions to be within scope of UK taxation.
Record keeping
Individuals that hold cryptoassets are responsible for keeping appropriate records for the transactions they undertake.
Some individuals may only undertake a few trades a year, and have relatively simple record keeping needs, while other clients may execute high-volume, daily trades.
The onus is on you to keep your own records for each cryptoasset transaction. Those records should include:
- the type of cryptoasset
- the date of the transaction
- if the asset was bought or sold
- the number of units
- the value of the transaction in GBP (as at the date of the transaction)
- the cumulative total of the investment units held; and
- bank statements and wallet addresses, in case of an HMRC enquiry.
Pro advice. Where you are looking to compile your records from a cryptoasset exchange, you should research how long that exchange keeps records of transactions.
Pro advice. There is dedicated software available that can help track cryptocurrency transactions. This should be reviewed in the first instance to ensure it meets your record keeping needs for UK tax purposes.
The majority of individuals will be subject to capital gains tax on a disposal of their cryptocurrency. Individuals using the remittance basis should be informed that HMRC has taken the view that where a token has no underlying asset the situs of the asset is to be determined by the residency of the beneficial owner, so an unexpected charge can arise.
The next step
HMRC Guidance: CRYPTO10000
HMRC Guidance: CRYPTO22150
Cryptoassets manual
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.