Tax treatment of crypto assets for individuals

In 2017 when we first discussed the tax treatment of cryptocurrency the Bitcoin price was at a record high. Perhaps because of the COVID19 pandemic and moves towards a cashless society, interest in crypto assets is increasing. We have previously covered businesses, so now we'll cover the tax treatment of crypto assets for individuals.   

Tax treatment of cryptocurrencies for individuals

What are cryptocurrencies and crypto assets?

This is a recap, or introduction if you're new to the world of crypto assets and cryptocurrency.

Typically with crypto assets, when a new product is launched the creators benefit from their initial holdings or additional awards of cryptoassets. They may also receive utility tokens. These utility tokens can be redeemed for access to a specific product or service. 

Much like a share offering, once the crypto assets launch they are tradeable on one or more crypto exchanges. These type of crypto assets are usually known as security tokens. For a start-up business, it can be an alternative method of raising external investment. Instead of say using the Enterprise Investment Scheme and Seed Enterprise Investment Scheme.

There are numerous different crypto assets. Cryptocurrencies  are just one type and are also known as exchange tokens. The most famous cryptocurrency is Bitcoin which even gets a mention in a John Grisham novel.

Cryptocurrency shares many aspects of other currencies. Though it is not regarded as currency or money by the Bank of England, G20 Finance Ministers and Central Bank Governors, or even HM Revenue.

However, there's also, Ethereum, Ripple, Bitcoin Cash , Litecoin. There's literally thousands of new forms of cryptoassets which are less like currency and can have other qualities. These qualities make them tradeable on a variety of worldwide platforms.

In October 2018 the Crypto assets Taskforce, published its report. This was an overview of cryptoassets and Distributed Ledger Technology.  It assessed the risks and potential benefits of crypto assets, plus set out the steps for potential regulation in the UK. This indicates that crypto assets are gradually being accepted into the mainstream as alternative investments.

The current tax treatment of crypto assets for individuals

The original HM Revenue guidance published in 2014 intimated that speculative crypotocurrency profits might be perceived as gambling and therefore tax-free. Given the large profits realised by some individuals at the tail end of 2017, unsurprisingly this now appears to have been withdrawn. 

This guidance was subsequently updated by HM Revenue in December 2018 and again in December the following year. The updated guidance on the tax treatment of crypto assets for individuals confirms the following:  

  • The 'gambling' tax treatment referred to above is unlikely to apply to an individual speculating in crypto assets
  • It is unlikely that any profits realised by an individual investing in cryptocurrencies will be subject to income tax - though see below 
  • You might be able to claim a capital loss if a crypto asset becomes of negligible value   
  • Exchange tokens such as Bitcoin are treated as located for tax purposes where the beneficial owner is resident

How crypto asset gains are taxed

The taxman does not currently accept that the tax treatment for currencies applies to cryptocurrency. HM Revenue regards crypto assets as intangible assets meaning that disposal proceeds are taxed as capital gains unless there is evidence of trading - see below.

Are you trading or investing in crypto assets?

Put simply, if you are trading in crypto assets you are potentially subject to income tax  on any losses or profits realised. If you are investing in crypto assets the capital gains tax treatment will most likely apply.  

The key approach to determine whether you are trading is to apply the Badges of Trade. Each of these tests is applied in the round though every case needs to be considered on its own facts. This is particularly so given the multi-functionality of some cryptocurrencies.

If you are actively mining cryptocurrency or dealing in multiple trades with a number of different third parties you could be regarded as trading.

Conversely if you buy and sell cryptocurrency, hold it as investment, then sell when the market conditions are right, any profits or losses realised are likely to be subject to capital gains tax.

Computational basis for capital gains tax

We originally suggested that HM Revenue would apply a pooling method for each different type of cryptocurrency or crypto asset. This approach has now been confirmed by HM Revenue.

So as an example, if you own Bitcoin, Ethereum and Litecoin, they have three separate pools. Each of these pools will have it’s own ‘pooled allowable cost’. The pooled allowable cost increases or decreases as more of that specific crypto asset are either acquired or disposed of.

If some of the crypto assets from the pool are sold, this is treated as a ‘part-disposal’. This means a proportion of the allowable cost is deducted when calculating any gain or loss.

Transactions within a 30 day period

Special rules apply when you acquire a crypto asset on either the same day you dispose of it, or within 30 days of it's disposal.

If these special rules apply, the new crypto assets and the costs of acquiring them stay separate from the main pool. Any capital gain or loss is calculated using the costs of the new crypto assets that are kept separately.

Some examples of these computational methods can be found in HM Revenue's guidance

Mining Crypto assets

HM Revenue consider crypto asset mining on your home computer is unlikely to be considered trading. Nevertheless, the value of any crypto assets awarded for successful mining will most likely be taxed as miscellaneous income. However, it should be possible to claim any relevant expenses to reduce the taxable amount received.

Alternatively, if you are using numerous computers specifically to mine crypto assets, this would probably be considered a trading activity.

Any mined crypto assets retained may be subject to capital gains or corporation tax on any profit realised later.

Receiving crypto assets as part of your employment package

Any crypto assets paid as a bonus from your employer will be taxed as employment income. Broadly speaking they will fall into two categories:

  • If they are readily convertible assets  - in other words capable of being traded on an exchange, they will be subject to PAYE on receipt.
  • Where they are not readily convertible assets any tax due is paid via your Self Assessment tax return. Your employer should treat the payment as being a Benefit In Kind and pay and report this on form P11D.

Location of crypto assets

HM Revenue previously remained silent on their view of the location (or situs rules) for crypto assets. However they have now clarified their viewpoint.

Essentially their view is that if you are UK resident, any crypto assets you hold are also UK situs. If crypto assets are jointly held,  each owner’s interest is located where they are resident. If any are UK resident, this will not affect the location for any non UK resident co-owners.

This is particularly relevant for non-domiciled individuals who calculate their tax liability on the remittance basis. In some cases, crypto assets may have been converted into fiat and paid into a non-UK bank account. These proceeds may have also remained outside the UK and so this point may subject to legal challenge at some point. 

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