Cryptocurrency transactions that are taxable
In this post we're going to discuss those cryptocurrency transactions that are taxable. We have also covered in more detail the tax treatment of cryptocurrency for businesses and individuals in earlier posts
Investing in cryptocurrency continues to be popular despite the recent collapse of the FTX exchange. Additionally, there is still some misconception about when cryptocurrency transactions are taxable. This topic is therefore worth a recap from when we first posted a number of years ago.
Additionally, The Financial Conduct Authority (FCA) has now updated the Anti-Money Laundering Regulations to include the following activities involving cryptocurrency transactions:
These categories of business are ‘obliged entities’ under the new AML legislation, bringing them into line with traditional financial institutions such as banks. This means businesses in this sector are obliged to implement measures to counter money laundering. For example undertaking customer due diligence KYC in the case of a cryptocurrency exchange.
It is therefore now even more important to ensure that you are compliant, whether you are an individual or business involved in the cryptocurrency space. Invariably you will therefore also need to be aware of when cryptocurrency transactions are taxable and these are discussed below:
Cryptocurrency received as employment income
In HMRC's view, where cryptocurrency is received as payment from an employment income these count as ‘money’s worth’, and are subject to Income Tax and National Insurance contributions on the value of the cryptocurrency when it is received.
HMRC's opinion is that where cryptocurrency is an exchange token - for example bitcoin and it can be disposed of via an exchange for fiat currency, they are regarded as readily convertible assets. The employer is therefore required to account to HMRC for the tax and National Insurance contributions due on the best estimate of the value of that asset.
The only exception to this rule might be where there was no market for the cryptocurrency received. For example where the token was not listed on an exchange and and acquisition was not freely available by a third party. In this case, the individual would potentially need to disclose and pay tax on the value of the cryptocurrency received under Self-Assessment.
Any subsequent disposal of the cryptocurrency received through employment may result in a chargeable gain for Capital Gains Tax purposes.
Cryptocurrency received from mining transactions
Cryptocurrency can be awarded to ‘miners’ for verifying additions to the blockchain digital ledger. Mining will typically involve using computers to solve difficult mathematical problems in order to generate new cryptocurrency tokens.
You will be taxed on the £sterling equivalent value of any cryptocurrency when awarded. Whether your crypto mining activity amounts to a taxable trade (with the cryptoassets as trade receipts) will depend on the particular facts and taking into account the badges of trade.
Alternatively the value of any cryptocurrency mined will be taxed as miscellaneous income (as opposed to trading profits) and subject to income or corporation tax.
Buying and selling cryptocurrency
Again as with the mining of cryptocurrency, the £sterling equivalent of any profits/losses realised from buying and selling cryptocurrency will be taxable. (regardless of whether there are any conversions to fiat currency).
The default position for HMRC is that only in exceptional circumstances would they consider a person or business conducting a financial trading activity.
Exchanging tokens for a different type of token
Where one form of cryptocurrency is exchanged for another form of cryptocurrency then as is the case for buying and selling cryptocurrency, any resulting profit (or loss) will be subject to capital gains tax rules.
There is no disposal (taxable event) if you retain beneficial ownership of your cryptocurrency throughout a transaction, An example of this would be moving cryptocurrency between different wallets.
Additionally where you are using a mixer, tumbler or similar service and receive the same cryptocurrency you placed in the transaction this will not be considered a disposal. However, there will be a taxable event where an individual receives a different token from the one they originally placed in the transaction.
Using cryptocurrency to pay for goods or services
If you use your cryptocurrency to pay for goods or services, you will be deemed to have disposed of this at the £sterling equivalent on the date of the transaction. If this represents only part of an existing cryptocurrency holding you will also need to consider the matching rules for pooling cryptocurrency.
Giving cryptocurrency to another person
If you give cryptocurrency to another person who is not your spouse or civil partner, you need to consider the £sterling value of what has been given away. For Capital Gains Tax purposes, you are treated as having received this £sterling value even if you don't actually receive anything.
If you donate cryptocurrency to a charity, you will not have to pay tax on this transaction. However this exemption does not extend to tainted donations and potentially where you dispose of the cryptocurrency for more than it's acquisition cost thus realising a gain.
These are the principle cryptocurrency transactions you need to be aware of, however we will cover other aspects of crypto taxes in future posts.
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