Tax treatment of cryptocurrency for businesses

We first wrote about the tax treatment of cryptocurrency several years ago, just before it captured the public's imagination. In Christmas last year, HM Revenue updated their view of the tax treatment for individuals from the old guidance published 4 years previously  They have recently extended their guidance to the tax treatment of cryptocurrency for businesses. The cynical amongst you might suggest this another ploy to bury new guidance just before a General Election!

Tax treatment of cryptocurrency for businesses

In this article, we'll summarise the main points arising from HM Revenue's guidance on the tax treatment of cryptocurrency for businesses.

It's noticeable that HM Revenue reiterate their view that the 'gambling' treatment does not apply to the buying and selling of cryptocurrency. 

The guidance covers some of the main activities that a company or business is likely to carry out in the cryptocurrency sector. These are set out below.

  • Buying and selling cryptocurrency
  • Exchanging cryptocurrencies
  • Cryptocurrency mining
  • Providing goods/services in return for cryptocurrency

Buying and selling cryptocurrency

HM Revenue will apply the Badges of Trade to determine whether any profit realised is of a trading nature and therefore subject to income or corporation tax.

If cryptocurrency is held as part of an existing non cryptocurrency related trade this will need to be considered when calculating the trading profits of a business. For example, where cryptocurrency is accepted as payment from customers, or used to pay suppliers.

Cryptocurrency mining

Again HM Revenue will seek to apply the Badges of Trade to determine whether a trading activity exists.

For example, if you use your home computer to mine cryptocurrency this is unlikely to be considered a trade. Any profits realised will be taxable as miscellaneous income. Conversely if you purchased a number of computers to mine cryptocurrency for an expected profit this would probably be regarded as a trading activity.

What is the accounting treatment?

Any business profits must be calculated in accordance with generally accepted accounting practice (GAAP).

For tax purposes, GAAP will mean either:

  • UK generally accepted accounting practice (UK GAAP)
  • For companies or other entities which prepare their accounts in accordance with international accounting standards (IAS), generally accepted accounting practice in relation to such accounts

Special rules for companies

It is important to note that HMRC does not consider cryptocurrency to be money or currency. This means that any Corporation Tax legislation relating solely to money or currency does not apply to crytpocurrency. For example the loan relationship rules for companies

Corporation tax intangible asset regime

Companies that account for cryptocurrency  as ‘intangible assets’ may be taxed under the Corporation Tax rules for intangible fixed assets. This would apply where cryptocurrency  is either an ‘intangible asset’ for accounting purposes or an ‘intangible fixed asset’. In the latter case it would have been created or acquired by a company for use on a continuing basis. Cryptocurrency simply held by the company, even when held in the course of its activities, does not fall within the intangible asset regime.

Pooling rules exceptions for companies

In their guidance for individuals, HM Revenue indicated that in broad terms cryptocurrency transactions would be aligned with the  share pooling rules where the capital gains tax treatment applied.

There are two exceptions to the pooling rules, which mean that the new cryptocurrency and the costs of acquiring it stays separate from the main pool.

  • If a company acquires crytpocurrecy on the same day it disposes of cryptocurrency  of the same type (even if the disposal took place first), the disposal is matched with the same-day acquisition in priority to any cryptocurrency held in an existing pool.
  • When a company acquires cryptocurrency that would usually be added to a pool but within ten days makes a disposal of the same type of cryptocurrency, this disposal is matched with the acquisition within the previous 9 days in priority to any tokens held in an existing pool. If there has been more than one acquisition within that period, then this rule applies on a ‘first in, first out’ basis.

VAT treatment

We've covered this point in a previous post, though to summarise HM Revenue have confirmed that in the majority of transactions involving cryptocurrency will be VAT exempt or outside the scope of VAT. The main exception to this rule being where goods or services sold are exchanged for cryptocurrency.

This VAT treatment outlined above may change pending the outcome of Brexit.

Stamp Duty treatment

For the transfer of cryptocurrency to fall within the scope of Stamp Duty or Stamp Duty Reserve Tax, it would need to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’ respectively. HMRC’s current view is that existing cryptocurrency is unlikely to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’.

Cryptocurrency may be given as consideration for purchases of ‘stock or marketable securities’ and/or ‘chargeable securities’. If cryptocurrency is given as consideration, this will count as ‘money’s worth’ and so will be chargeable for Stamp Duty Reserve Tax purposes. Any tax liability due will be calculated on the £ sterling value of the cryptocurrency at the relevant date.

If cryptocurrency  is given as consideration for a land transaction, this would fall within the definition of ‘money or money’s worth’ and so be chargeable to Stamp Duty Land Tax.

Venture capital schemes involving cryptocurrency

One final important point covering the tax treatment for cryptocurrency for business is whether a cryptocurrency sector business qualifies for venture capital reliefs.

Any company, investor and proposed investment must meet the conditions of the scheme opted for. Because schemes do not include any cryptoasset-specific conditions, HM Revenue applies the same view to cryptocurrency or cryptocurrency related technology cases as they would any other business.

For example providing goods or services to customers operating in the cryptocurrency sector or accepting cryptocurrency as payment for goods or services would not preclude relief being given.

Equally, dealing in crytpocurrency, exchanging crytpocurrency transactions and mining crytpocurrency may not be considered a qualifying trade. Furthermore, the holding of significant amounts of cryptocurrency may cause a business to become non-qualifying.  

Given the uncertainty about whether a cryptocurrency sector business might qualify for relief then it would be prudent to seek an advanced assurance from HM Revenue beforehand.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

For more useful information, check out our Ebooks here.

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