Latest update on cryptocurrency and taxes

When we first posted about cryptocurrency and taxes back in 2017 there was little guidance on the subject. However, HMRC have since published details of their view of the tax treatment of cryptocurrency for individuals and businessesThis previous guidance has now been consolidated and published in their manual detailing their latest update on cryptocurrency and taxes. 

Latest update on cryptocurrency and taxes

In this post, we've selected some of the more interesting developments in HMRC's latest update on cryptocurrency and taxes.

As a starting point, HMRC have now acknowledged that Stable coins are another form of crypto asset. Essentially these type of crypto assets are designed to be less volatile as they are potentially pegged to something whose value has stability. For example fiat currency (which is government-backed) or precious metals such as gold or silver.

HMRC have also indicated that the tax treatment will be dependent on the nature and use of the crypto asset and not the definition of the token itself.

Crypto asset derivatives

Because the nature of a derivative typically does not directly involve holding a crypto asset HMRC's guidance on crypto assets is unlikely to apply to these type of transactions.

Put very simply the position is as follows:

  • Where a company enters into a derivative over a crypto asset this will typically constitute a ‘derivative contract’ for corporation tax purposes. This means that any profits or losses arising on these type of transactions will usually be subject to capital gains tax rules 
  • Similarly for individuals any profits or losses arising on derivative contracts involving crypto assets will most likely be treated as capital gains or capital losses

However, we would stress that this will not always be the case and it's possible that a derivative contract may fall outside of these rules. If that's the case any profits or losses arising will potentially be regarded as losses/profits from a trading activity.

HMRC's view on record keeping

HMRC acknowledge that various exchanges may only retain records of transactions for a limited period. Alternatively, the exchange may no longer exist by the time you complete your tax return. Unsurprisingly HMRC consider the onus is on the individual to keep their own records.

HMRC considers records should be kept for each crypto asset transaction and must include the following:

  • The type of crypto asset
  • Date of transaction
  • Whether they were bought or sold
  • The number of units involved
  • The value of the transaction in £ sterling (on the date of the transaction)
  • Cumulative total of the investment units held
  • Bank statements and wallet addresses in case they are required as part of an enquiry

It would also be prudent to keep a record of the source of your original investment in cryptocurrency. For example whether from savings or earnings already taxed.

Crypto staking

Some types of crypto mining require ‘staking’ of exchange tokens which weights the entitlement to newly forged tokens. 

Whether this activity amounts to a taxable trade (with the crypto assets as trade receipts) will depend on a number of factors, include the level of activity, degree of organisation, scale of risk and commerciality involved.

If the staking is not considered a trading activity, the £ sterling value (at the time of receipt) of any cryptoassets awarded for successful mining will generally be taxable as income (miscellaneous income), with any appropriate expenses reducing the amount chargeable.

If the miner keeps the awarded assets, they might pay either Capital Gains Tax or Corporation Tax on Chargeable Gains when they later dispose of them.

Contributions to pension schemes

Because HMRC does not consider exchange tokens to be currency or money, any pension contributions paid in the form of crypto currency will potentially not qualify for tax relief

Whilst pension contributions paid in the form of crypto do not qualify for tax relief they nevertheless become part of the pension scheme fund which is subject to the pension scheme tax rules. It may therefore be possible to secure tax-free growth by investing in crypto assets from within a pension scheme.  

Crypto assets for betting and gaming transactions

The use of crypto assets to participate in betting or gaming is treated in the same way as cash and excise duty is due from the bookmaker/gaming provider. 

HMRC has once again reiterated they do not consider the buying and selling of crypto assets to be the same as gambling. Whether a transaction can be characterised as betting or gambling is a question of fact. 

HMRC will ultimately decide by considering the particular facts of any transaction involving crypto assets and conclude whether a transaction is of a betting or gambling nature. However we would stress that it is highly unlikely this beneficial tax treatment will be applied to any profits realised from cryptocurrency.

The updated guidance is mostly helpful, though rather frustratingly in places HMRC continues it's fetish of withholding content because of exemptions in the Freedom of Information Act. In particular it would have been very insightful to know the questions HMRC are likely to ask during the course of an enquiry!

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