The Taxing Of Cryptoassets
Posted 07 Mar 19
People all around the world are dipping their toes into the exciting world of cryptocurrency at the moment, and more than likely finding themselves wading through crypto-news articles and research before making that big jump towards investment. Whilst many associate this highly technical development with the likes of financial professionals or web extraordinaires, part of the beauty of this phenomenon is it’s extremely diverse popularity. If you delve into the world of rap music for example, you’ll find that grammy nominated Akon is behind the building of a 100% cryptocurrency-based city in Senegal, as part of a wider initiative to help African countries build their own economies and communities. Something not every musician could accredit themselves.
A Quick Introduction To Cryptocurrency?
Cryptocurrency is primarily centred around the extremely secure, digital, transfer of a currency thats holds a value of some form. Just like fiat currencies, there are a number of different crypto ‘coins’ or ‘units’ in the cryptocurrency market each of which holding their own unique benefits and of course, popularity amongst investors. The basic idea of cryptocurrency has been around for a lot longer than many might think, but has only really sparked its popularity around 10 years ago with the works of Satoshi Nakamoto. This anonymous identity uncovered that where a number of long-standing financial institutions have failed to gain trust, the cryptocurrencies might just succeed. Their three unique characteristics of being decentralised in nature, a trustless entity and immutable has since thought to spark a surge in popularity for cryptocurrency.
Cryptoasset Legislation From HMRC
The landscape of cryptocurrencies is a popular but incredibly fluid one, so keeping afloat of the game could be the difference between making or losing money on that latest investment. Allocating a few minutes here and there to keep on top of the cryptocurrency market is one thing, but have you ever considered the tax implications of this digital currency? The HMRC have recently released a policy paper detailing the role of Income Tax and Capital Gains tax when it comes to cryptoassets, and below we have provided a brief overview to get you started.
Different Types Of Cryptocurrency
One of the first things to note when looking into this area is that the HMRC (as backed by the Cryptoassets Taskforce report or CATF) makes clear that it does not consider cryptoassets (or cryptocurrency) as money or a currency as such. There are huge range of ‘coins’ in the cryptocurrency market which can be helpfully grouped into three different categories, making it a little easier to determine which taxes might apply to you.
Utility tokens - are normally issues by a group or business and will ordinarily provide the user with access to goods or services.
Exchange tokens - these are primarily intended as a means of payment and is the category that the majority of large cryptocurrencies such as bitcoin tend to fall into, it’s value tends to be determined by use as a mean of investment or exchange. This is the main type of token to be discussed in the policy.
Security tokens - are typically a means of providing the holder with any specific interests in a business.
Which Cryptoasset Taxes Apply?
For many cryptoasset holders, cryptocurrencies are being held as personal investments which would mean they are fairly likely to be subject to Capital Gains Tax when disposed of. If however, the holder is one of the growing number of people who receive cryptoassets from an employer as a form of payment or as a result of another process such as mining, then it is very likely that Income Tax and National Insurance contributions will need to be made.
Cryptocurrencies and Income Tax
Determining whether or not Income Tax payments should be made on your cryptoassets largely comes down to what it is an individual is doing, i.e. whether or not there is a ‘trade’ involved. As with most trading activities, if a profit is being made from trade then Income Tax should really be paid, of course when it comes to Cryptoassets the definition of ‘trade’ become a little more tricky to determine. In order to determine the extent to which trading of cryptoassets should result in taxing, there is certainly a lot of background reading to be done, but for a little more information please see the HMRC’s Business Manual.
An ‘Airdrop’ is a name used in the crypto-world to describe a lucky individual receiving a certain allocation of cryptoassets, quite often as a result of taking part in some form of marketing activity. They are slightly unique in that they tend to have their own infrastructure and will under certain circumstances will also be subject to Income Tax in one form or another.
Cryptomining is a whole new ball game and there is a similar level of ambiguity surrounding whether or not it counts as ‘taxable trade’. According to the HMRC this will depend on factors such as: commerciality, risk ,organisation and of course degree of activity. If it’s thought that the cryptocurrency mining activity isn’t quite considered a ‘trade’ then it’s fairly likely that the pound sterling value (at the time) of any of the cryptoassets gained from mining will be taxed as miscellaneous income.
Cryptocurrencies and Capital Gains Tax
If an individual chooses to ‘dispose’ of cryptoassets there are a few things to consider such as whether cryptoassets are being sold to be used as money, in order to know whether you are subject to Capital Gains Tax. In very short terms, HMRC suggest that the buying and selling of any form of cryptoasset will most likely be considered an investment activity and therefore subject to Capital Gains Tax. Although the very nature of digital cryptoassets means they are intangible, in the eyes of Capital Gains Tax they are considered a ‘chargeable asset’ if they are capable of being owned as well as having a value that can be realised.
There are of course a certain number of allowable costs that can be considered a part of the final calculation such as advertising or transaction fees, however it is worth noting that cryptomining will not count towards this deduction. This process does become a little more complicated when it is thought that mining amounts to a trade for tax purposes, as they then become part of a trading stock but for a little more information on that please see HMRC’s Capital Gains Manual. The HMRC also states that cryptocurrencies are subject to ‘pooling’ for tax purposes,whereby the amount originally paid for the tokens (pound sterling) is collated and forms the ‘pooled allowable cost’. There is also a detailed overview of Capital Gains Tax in the light of blockchain forks whereby the community does something different to create a ‘fork in the blockchain’ which can sometimes result in new coins being created. For more information on each of these areas please see the HMRC’s cryptoasset policy paper.
This article was intended as a brief introduction to the impact of Income Tax and Capital Gains tax on cryptoassets in light of the HMRC’s recently released policy paper which as stated “does not explicitly consider the tax treatment of cryptoassets held for the purposes of a business carried out by an individual”. There is a wealth of information you might want to discover when it comes to understanding the impact of tax on your cryptoassets, and for more information on areas not covered in this article including cryptoassets received as earnings, record keeping or any other considerations please see the HMRC’s Cryptoassets For Individuals.