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Last updated: 22 Sep 2021
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Decrypting cryptoassets – the UK personal tax implications

Cryptoassets have now become commonplace in society. The values of these assets have seen astronomical growth, which has led to some individuals making significant financial gains. However, as this is still a relatively new area, the tax position can be unclear.
What are cryptoassets?

In March 2021, HMRC issued its latest guidance on how it believes cryptoassets should be taxed, based on its interpretation of how the current tax laws that are in place apply to these assets. This guidance has been in development since HMRC’s first publication in 2014 and it outlines the tax implications that could arise when a taxpayer is involved with cryptoassets. 

What are cryptoassets?

It’s important to first define what exactly is considered as a cryptoasset. HMRC defines them as “cryptographically secured digital representations of value or contractual rights”, which covers many of the main types of cryptoassets:

  1. Exchange tokens – by far the most common category and how many would define cryptoassets; this covers cryptocurrencies that are meant to be used for payment, such as Bitcoin.
  2. Utility tokens – tokens that provide the holder with access to goods or services.
  3. Security tokens – as the name suggests, these tokens act as a security in a business, similar to a shareholding.

About the author

Howard Ledingham

+44 (0)20 7556 1206
ledinghamh@buzzacott.co.uk
LinkedIn

In March 2021, HMRC issued its latest guidance on how it believes cryptoassets should be taxed, based on its interpretation of how the current tax laws that are in place apply to these assets. This guidance has been in development since HMRC’s first publication in 2014 and it outlines the tax implications that could arise when a taxpayer is involved with cryptoassets. 

What are cryptoassets?

It’s important to first define what exactly is considered as a cryptoasset. HMRC defines them as “cryptographically secured digital representations of value or contractual rights”, which covers many of the main types of cryptoassets:

  1. Exchange tokens – by far the most common category and how many would define cryptoassets; this covers cryptocurrencies that are meant to be used for payment, such as Bitcoin.
  2. Utility tokens – tokens that provide the holder with access to goods or services.
  3. Security tokens – as the name suggests, these tokens act as a security in a business, similar to a shareholding.
Capital Gains Tax (CGT)

Capital Gains Tax (CGT)

The most common transactions individuals undertake with cryptoassets are the buying and selling of a particular token as an investment. As with other assets you buy and sell as an investment, you pay CGT when you make a gain on a disposal. Similar to other assets, you can deduct associated costs of disposal and acquisition, such as the purchase price, transaction fees and valuations. 

HMRC’s latest guidance details the rules that it deems applies to the disposal of cryptoassets. Most importantly, a pool needs to be created for the base cost of the particular token when calculating the capital gain. There are various rules that apply to share and cryptoasset pooling and this is further complicated by exchanges and software associated with cryptoassets that are often not developed to assist with tax reporting, unlike share portfolios. Care should therefore be taken by individuals making a significant number of trades, as it will be their responsibility to correctly report any capital gains made to HMRC. 

As well as reporting capital gains, individuals can also claim capital losses when their investment has been disposed of at a loss. HMRC advises that negligible value claims will be accepted when an asset’s value has become worthless with no chance of recovery, but care should be taken in cases where the private key, which provides access to the wallet where the cryptoassets are stored, has been lost.

This can occur, for example, when a password is simply forgotten, stored on hardware which is lost, or becomes inaccessible. In these cases, there would need to be evidence that the key cannot be retrieved, rather than it simply being misplaced. Where the key is misplaced, a negligible value claim may not be accepted by HMRC.

For non-domiciled individuals claiming the remittance basis of taxation, care should be taken when reporting cryptoasset gains. The question of where cryptoassets are located is one that has not yet been determined and HMRC’s opinion on the matter raises a number of questions. 

Income tax

Income tax

There are also certain circumstances where income tax may be payable. The most common scenarios are when cryptoassets are received in relation to employment, the mining of tokens (where new cryptoassets are earnt by solving cryptographic equations) and where the buying and selling of tokens is considered a trade.

Similar to shares, for an individual to be deemed to be trading and subject to income tax on the gains arising from cryptoassets, HMRC advises that there would need to be exceptional circumstances in a particular case. For this, the badges of trade would need to be considered which applies to any ‘trade’ being undertaken for tax purposes. Some examples of factors to consider include, but are not limited to, the frequency of transactions, the source of funding and the sophistication of the operation.

Speak to an expert
Speak to an expert

With the taxation of cryptoassets still a work in progress, it’s important to consider your own personal circumstances when determining the taxes that apply. For assistance with this, or if you have a query about any of the topics mentioned in this article, please fill in the form below and one of our experts will be in touch to discuss how we can help.

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