Taxing Cryptocurrencies: what investors in the UK need to know
In 2015, the number of people investing in cryptocurrencies was estimated to be between 500,000 and 1,000,000 worldwide. In the last three years, we’ve seen the market cap of the original cryptocurrency (Bitcoin) grow from $6bn to $63bn, and the number of individuals investing in cryptocurrencies skyrocket with claims that a third of millennials in the UK have invested and one in five UK adults have considered investing in cryptocurrencies. This has become a challenge too big for HMRC to ignore and in December 2018, HMRC published its first detailed tax legislation for individuals who hold, trade or mine cryptocurrencies.
by Jon Dawson, Senior Manager, haysmacintyre
In their introductory paper, HMRC suggested that each case will be looked at individually to understand the true nature of the transactions and added that their views ‘may evolve further as the sector develops’. They went on to say that legislation will be drafted regarding businesses’ obligations in due course, but no indication of timing has been given, as of yet.
For most of those who own or have owned cryptocurrency, the tax treatment is relatively straight forward. Individuals holding cryptoassets for capital appreciation in its value, or to make a particular purchase will be liable to pay Capital Gains Tax (CGT) when they dispose of the cryptoasset. This is no different to buying and selling art, jewellery or stamps, and it should be noted that this is only applicable to assets which are disposed of for more than £6,000.
A disposal is considered a transfer between one type of cryptoasset to another, the transfer of a cryptoasset to fiat currency, the use of cryptoassets to pay for goods or services or giving away cryptoassets to another person (other than your spouse). In situations where the same cryptoasset has been disposed of and acquired within a 30-day period, specific rules apply — otherwise known as the ‘Bed and Breakfast’ rule.
With the value of most major cryptocurrencies plummeting in 2018, many individuals will be pleased to know that certain ‘allowable losses’ can be used to offset capital gains, but these losses must be reported to HMRC first. For example, if a loss of £50k was made on the disposal of Bitcoin and in the same tax year, a profit of £70k was made on the sale of a painting, the taxable gain for CGT purposes would be £20k. This would be part covered by the £11.7k tax-free allowance, and so CGT may only be payable on £8.3k of the gain.
As with most tax legislation in the UK, it’s not always straight forward and there are a number of additional rules which have been introduced to provide clarity in unusual situations. For cases where the cryptoassets are considered worthless, lost or stolen (particularly relevant given how recent studies demonstrate that around 20% of Bitcoin is lost), HMRC provided the following guidance:
- If an asset is considered to have lost its value or have negligible value, then an individual may make a claim to HMRC stating the asset, amount the asset should be treated as disposed of (which may be £0) and the date of deemed disposal. A ‘negligible value claim’ treats the cryptoassets as being disposed of and re-acquired at an amount stated in the claim
- Losing a private key does not count as a disposal for CGT purposes. However, a negligible value claim could be made if there is no prospect of recovering the private key or accessing the cryptoassets in the corresponding wallet
- Being the victim of fraud or theft is not a disposal for CGT purposes as the individual still owns the assets, thus a loss cannot be claimed for CGT. However, if there is no realistic opportunity to get the assets back then a negligible value claim may be appropriate
The above guidance focuses on the tax treatment of cryptoassets, assuming they are held for capital appreciation. However, there are many other reasons where individuals might own cryptoassets.
Individuals are liable to pay Income Tax and National Insurance (NI) on cryptoassets received from their employer as a form of payment or remuneration. Employers need to be aware that they are responsible for deducting PAYE and NI on Readily Convertible Assets (RCAs). If, on the other hand, the cryptoasset is not considered to be an RCA, then the employee is responsible for declaring and paying tax to HMRC. It’s worth noting that any subsequent disposal of the cryptoassets received as a form of remuneration, may result in a chargeable gain for CGT purposes.
There is also a responsibility to pay Income Tax and NI on cryptoassets that is received from mining, transaction confirmations or airdrops, unless the person did not provide any form of repayment for benefitting from the airdrop. Again, if the cryptoassets subsequently increase in value, this may result in a chargeable gain for CGT purposes — if you thought mining Bitcoin was complex, then calculating the tax liability as a result of it could be even more of a minefield!
HMRC detailed some further considerations worthy of noting:
- For the purposes of Inheritance Tax, cryptoassets will be considered as property
- Cryptoassets are not considered to be currency or money, so they cannot be used to make a tax relievable contribution to a registered pension scheme
- HMRC does not consider the buying and selling of cryptoassets to be the same as gambling
For many, HMRC’s guidance is a significant step forward in terms of regulating cryptoassets. We hope that legislation will be issued shortly for businesses who hold cryptoassets, to keep up the momentum and put even more pressure on the Government and FCA to consider the regulation of this relatively new form of investment.