Cryptocurrency – how is it taxed?

Cryptocurrency has been the investment topic at the forefront of the news and social media over the past 18 months. HMRC is playing catch up in relation to how to regulate cryptocurrency and are now looking to adapt legislation to tax cryptocurrency in the same way they do with other investments, such as shares.

What is Cryptocurrency? 

Cryptoassets (or cryptocurrency) are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.

Bitcoin, Ethereum and Ripple are the most well-known cryptocurrencies. Cryptocurrencies are traded on exchanges, such as Coinbase and Binance, however due to market growth, many cryptocurrencies can now be traded on regular trading apps, alongside stocks and shares.

What is the current tax treatment of Cryptocurrency?

For tax purposes, cryptocurrency is largely taxed in the same manner as shares. If an individual makes a personal investment into cryptocurrency, they will be treated as holding an asset.

If the cryptocurrency was then sold, capital gains tax would become payable at 10/20% on any gains made in excess of the annual exemption.

Any losses made are also allowable losses for capital gains tax purposes, and can be offset against other gains in the year, or can be carried forward against future gains.

However, if an individual was to receive cryptocurrency;

  • as form of a non-cash benefit from their employer, or
  • from mining (generating new tokens), or
  • airdrops (receiving a token as part of a marketing/advertising campaign for a service in return), or
  • confirmation rewards

these would be liable to income tax and would be taxable at 20/40/45%.

An individual could potentially be deemed to be trading in cryptocurrency (like share trading), the main factors HMRC look upon when deciding if such activities amount to taxable trades are: 

  • degree of activity 
  • organisation 
  • risk 
  • commerciality 

Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that it is deemed to be trading, and as such any income being chargeable to income tax rather than capital gains tax. 

The tax treatment for companies holding and trading cryptocurrency is largely the same as the rules for individuals. However, depending on how the company accounts for such assets could affect the tax treatment of the assets and any gains made.  

What is deemed a Disposal? 

It is important to consider what is deemed a disposal of cryptocurrency for capital gains tax purposes. It is a common misconception that a disposal only takes place when a token is sold for cash which is deposited into a wallet on the exchange.  

However, for cryptocurrency purposes, a disposal is a broad concept and includes: 

  • selling tokens for money 
  • exchanging tokens for a different type of token 
  • using tokens to pay for goods or services 
  • giving away tokens to another person (unless it is a gift to their spouse or civil partner)

There would be no disposal if an individual retained ownership of a token through the transaction, and was simply moving tokens between exchanges that they beneficially own. 

It is fairly common for investors to rack up many thousands and even millions of transactions, with each one counting as a disposal, particularly if investors are using algorithms and trading programs to shift from one coin to the latest one that is deemed to be ‘going to the moon’. 

Therefore, it is important to remember that each transaction constitutes a disposal for capital gains tax purposes and must be reported on a tax return if necessary. 

HMRC Crackdown

HMRC released consolidated tax guidance earlier this year in relation to UK tax rules on cryptocurrency. On top of this, they have also reached an agreement with the leading exchange, Coinbase, to provide them with information on its users with more than £5,000 worth of cryptoassets on the platform during the 2019-20 tax year.  

It is likely HMRC will get agreements in place with all exchanges so they can directly access information relating to investors and can raise investigations and assessments where gains have not been previously reported. 

It is therefore likely that we will see many assessments and investigations raised over the next year or so, as HMRC look to collect tax that should have been paid on gains made on cryptocurrency. 

How can MHA Moore & Smalley help?

Cryptocurrency is a fast-growing market which HMRC want to get a handle on and ensure that tax is being paid correctly.  

It is therefore important to be mindful on the rules in relation to cryptocurrency and report any gains accordingly. If you have any questions regarding cryptocurrency, please contact Muhammad Desai who will deal with your queries accordingly.