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Last updated: 25 May 2022
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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?

Activities within the cryptoasset space are continually evolving, and this can present challenges in determining the UK tax position. HMRC attempts to resolve the main issues through 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. 

HMRC is issuing nudge letters as reminders to those who invest or trade in cryptoassets, to ensure that are paying any tax due. If you’ve already been investing or trading in crypto, you should urgently review your tax position before you receive one of the nudge letters, as you may be at risk of receiving a HMRC enquiry into your tax affairs.

About the author

David Conway

+44 (0)207 710 0363
conwayd@buzzacott.co.uk

Activities within the cryptoasset space are continually evolving, and this can present challenges in determining the UK tax position. HMRC attempts to resolve the main issues through 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. 

HMRC is issuing nudge letters as reminders to those who invest or trade in cryptoassets, to ensure that are paying any tax due. If you’ve already been investing or trading in crypto, you should urgently review your tax position before you receive one of the nudge letters, as you may be at risk of receiving a HMRC enquiry into your tax affairs.

What are 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:

  • 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.
  • Utility tokens – tokens that provide the holder with access to goods or services.
  • Security tokens – as the name suggests, these tokens act as a security in a business, similar to a shareholding.

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. 

Care should also be taken when reporting cryptoasset gains for non-domiciled individuals claiming the remittance basis of taxation. The question of where cryptoassets are located is one where HMRC and the tax profession generally do not agree and HMRC’s opinion on the matter raises a number of questions.

Capital losses

As well as reporting capital gains, you can also claim capital losses when your investment has been disposed of at a loss. This is particularly useful given the volatility of the crypto market, which can see investors commonly realise losses in a downturn. Significantly, these losses can be utilised against non-crypto related capital gains, either in the year of the loss or in future years.

Should a coin become worthless with no chance of recovering value, a negligible value claim may be accepted by HMRC, which has the effect of disposing of the assets and reacquiring it at nil cost. This is an effective way of realising a capital loss, which can reduce CGT on other gains, as outlined above. Even when the claim is made, investors retain the asset, although HMRC generally take a hard line as to what constitutes negligible value and qualifying coins will in their nature have no realistic chance of increasing in value. It's also important to consider carefully the proof that will be required to prove your case to HMRC.

In instances where a private key, which provides access to the wallet where the cryptoassets are stored, has been lost (for example, when a password is simply forgotten, stored on hardware which is lost, or becomes inaccessible) a negligible value claim can also be made. To successfully make this claim HMRC would need 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.

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), staking 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.

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