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Crypto Tax Update: HMRC Publishes Guidance on the Taxation of Cryptoassets for Individuals

  • United Kingdom
  • Financial services and markets regulation
  • Tax planning and consultancy

09-01-2019

Following hard on the heels of the Cryptoassets Taskforce Final Report published in October 2018, HMRC published new guidance on the taxation of “Cryptoassets for Individuals” on 19 December 2018.

The Guidance provides some clarity on the tax treatment of cryptoassets for individuals. This is welcome given the fast-approaching self-assessment filing deadlines for individuals. It is also timely, given the rollercoaster period of values of cryptoassets over the last two years.

With this in mind, individuals who hold cryptoassets should consider closely the Guidance on the self-assessment return which they are due to file, despite the late arrival of the Guidance.

1. Cryptoassets distinguished from currency

Following the Taskforce Report, HMRC adopt the term “cryptoassets” in the Guidance, as opposed to cryptocurrencies. The Guidance uses the Taskforce Report’s tripartite classification of cryptoassets:

• Exchange Tokens - often seen as the paradigm of 'cryptocurrencies', these refer to Bitcoin, Litecoin and equivalents. They utilise a DLT platform and are not issued or backed by a central bank or other central body. They do not provide the types of rights or access provided by Security Tokens or Utility Tokens, but are used as a means of exchange or for investment and enable the buying and selling of goods and services, and facilitate regulated payment services.

• Security Tokens - these amount to a 'Specified Investment', as set out in the Financial Services and Markets Act (2000) (Regulated Activities) Order (RAO). They may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or financial instruments under the EU's Markets in Financial Instruments Directive II (MiFID II). They enable firms and consumers to gain direct exposure by holding and trading cryptoassets, or indirect exposure by holding and trading financial instruments that reference cryptoassets.

• Utility Tokens - which can be redeemed for access to a specific product or service that is typically provided using a DLT platform. They can be used to support capital raising and/or the creation of decentralised networks through Initial Coin Offerings.

The Guidance focusses, however, on Exchange Tokens alone with HMRC taking the view that they do not consider any cryptoassets to be currency or money for tax purposes. The Guidance does nevertheless set out some starting principles for the taxation of Utility Tokens and Security Tokens, although a different tax treatment may need to be adopted. HMRC also note that in considering the tax treatment they will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place. See further our briefing on “Taxing Token Generation Events”.

Referring specifically to Exchange Tokens, HMRC consider that the value of the tokens is as a consequence of its use as a means of exchange or investment.

Some of the key points in the Guidance are covered below. There are special considerations that apply in the case of airdrops, (i.e. where an allocation of tokens or other cryptoassets are received as part of a marketing or advertising campaign in which individuals are selected to receive them, or where tokens are automatically provided due to other tokens being held, or where an individual has registered to become eligible to take part in the airdrop), forking and other aspects of the Guidance which are not covered below.

2. General Principles for Taxing Cryptoassets Held By Individuals

HMRC’s view is that in most cases individuals are likely to acquire, hold and dispose of cryptoassets as an investment. Consequently, capital gains realised on disposals will be subject to capital gains tax.

However, HMRC leave open the possibility that in some exceptional situations an individual may be engaged in trading cryptoassets and in such situations the individual will be subject to income tax on trading profits. The analysis of whether the cryptoassets are held as a trading asset or an investment will be determined in line with the existing approach (and case law) employed in relation to shares, securities and other financial products. If found to be trading, the income tax provisions will apply. Many individual taxpayers will welcome HMRC’s clarification on their position on the likelihood of cryptoasset activity being trading or investment activity.

Interestingly, HMRC note that they do not consider the buying and selling of cryptoassets to be the same as gambling. This appears to be in contrast to the previous view in Revenue and Customs Brief 9 (2014) where HMRC had left open the possibility of a cryptoasset transaction being gambling. By way of background, gains from gambling are not taxable. The new guidance is therefore timely given many individuals may have been tempted to file their self-assessment tax return on 31 January 2019 or indeed not file a tax return at all on the basis that the gains they made in the 2017/2018 tax period was the result of a smart bet or a gambling transaction. HMRC have made clear that the upside to that bet is taxable.

Those individuals who unfortunately found themselves nursing losses as a result of disposing of their cryptoassets in the first quarter of 2018 after buying assets at the tail end of 2017 or finding that they hold assets which have become worthless can at least take comfort from the fact that the Guidance makes clear that it is possible for them to claim allowable losses to reduce their overall capital gains.

However, individuals who have fallen or could fall victim to theft of their cryptoassets whether from the accounts they hold at cryptocurrency exchanges, in wallets or otherwise, should note that they cannot claim a loss for capital gains tax purposes.

3. Cryptoassets as Employment Income

Cryptoassets received from employers as a form of non-cash payment will be subject to income tax and NICs. Whether employers will be required to account to HMRC via PAYE will depend on whether the cryptoassets are considered readily convertible assets (cryptoassets will be considered readily convertible assets if trading arrangements exist or are likely to come into existence (e.g. Bitcoins can be exchanged on token exchanges in order to obtain an amount of money)). If the cryptoasset is not a readily convertible asset then the employer does not need to account to HMRC via PAYE, but an obligation will apply to the individual to declare and account to HMRC via self-assessment. Therefore, from a practical perspective employers should inform employees in situations where they consider the cryptoassets to not be readily convertible assets.

Subsequent disposals of cryptoassets by employees that were received through employment may also be subject to capital gains tax.

4. Cryptoassets Received by Miners

“Miners” have been defined as people that verify additions to the blockchain ledger. The Guidance provides that based on certain factors mining may constitute a taxable trade, but also acknowledges that in some situations it may not be a taxable trade. If considered a trade, then cryptoassets awarded to miners for the mining will be taxable as trading income, and if not a trade it will be taxable as income (miscellaneous income) (with appropriate expenses reducing the amount chargeable).

Similar principles apply in the case of fees or rewards received for mining (and any increase in the value of the assets will be taxable as capital gains or trading income as appropriate).

5. Pensions

Cryptoassets cannot be used to make a tax relievable contribution to a registered pension scheme.

6. Inheritance Tax

Cryptoassets are property for the purposes of inheritance tax.

7. Record Keeping

HMRC highlight the risk that cryptoasset exchanges might only keep transaction records for brief periods, or the exchange might not exist at the time the individual completes their tax return. Therefore, individuals are required to keep appropriate records for each cryptoasset transaction for the purposes of their tax records.

If cryptoassets are traded on exchanges that do not use pound sterling, the value of any gain or loss must be converted into pound sterling on the self-assessment tax return. If a transaction does not have a pound sterling value (the example cited by HMRC is when Bitcoin is exchanged for Ripple) then an appropriate exchange rate must be established in order to convert the transaction in to pound sterling. Records should be kept of the valuation method.

8. Next Steps

It is anticipated, as noted in the Guidance, that HMRC will publish further information about the tax treatment of cryptoasset transactions involving businesses and companies.

If you would like to discuss any issues in this briefing please contact Ben Jones (tax), Andrew Henderson (commercial and regulatory), Deepesh Upadhyay (tax), Kunal Nathwani (tax) and James Burnie (commercial and regulatory).

See here for the Guidance.

For more information contact

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