HMRC has issued guidance on the tax treatment of cryptoassets such as bitcoin. Which taxes could be charged on your clients’ profits?

What are cryptoassets?

Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically. There are currently three recognised types of token: exchange, security and utility tokens. Current HMRC guidance focuses on exchange tokens, which includes bitcoins.

In line with the guidance for individuals, HMRC confirmed that the relevant tax provisions will apply based on the facts of each case rather than by reference to terminology.

Is the business trading?

You will need to consider the badges of trade in order to apply the correct tax treatment.

Whether the buying and selling of exchange tokens amounts to a trade depends on a number of factors such as:

  • degree and frequency of activity
  • level of organisation
  • intention (including risk and commerciality).

If a sole trade or partnership is carrying on a trade, the individuals will pay income tax on the profits; companies will be liable to corporation tax. If the buying and selling does not amount to a trade, each transaction/exchange is a capital disposal for tax purposes, i.e. individuals are subject to capital gains tax and companies are subject to corporation tax on any capital gains.

Is the business accepting exchange tokens as payment for goods and services?

It is important to note that HMRC does not consider any of the current types of cryptoasset to be money or currency so exchanges involving cryptoassets should be accounted for in the same way as any other asset.

HMRC has confirmed that when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself.

Are your client’s employees earning exchange tokens?

Where businesses give exchange tokens to their employees, income tax and NI will be charged. The employer may also be required to apply PAYE, depending on the nature of the payment.

Employers cannot make a contribution to a registered pension scheme with exchange tokens.

HMRC has confirmed that due to the fast-moving nature of this sector, it will continue to develop its guidance where necessary.

Tip. Review your clients’ cryptoasset transactions as soon as possible to identify risks and assist with record keeping.

The guidance can be found here.