This week HM Revenue & Customs (“HMRC”), the UK’s tax authority, set out its view on how individuals should be taxed when handling cryptoassets which can be used as a method of payment, such as Bitcoin. There are no significant surprises in HMRC’s guidance, which relies on existing principles to determine whether income tax or capital gains tax applies. However, when dealing with cryptoassets, individuals should be aware that they may be subject to additional record keeping obligations and may be required to submit a self assessment tax return in some cases.
HMRC has committed to publishing separate information for businesses in due course.
Income tax charges
Broadly, the tax treatment of cryptoassets depends on whether the individual is carrying out trading activities.
- If HMRC assesses that an individual is trading (by reference to the degree of activity, level of organisation, risk and commerciality of the activities being carried out) income tax will apply to those trading profits generated. For example, any profits or fees arising from mining Bitcoin on a commercial scale will be taxed as trading profits. It follows that an individual may use losses generated through trading to offset future profits.
- Where an individual receives cryptoassets as a form of payment for a service and is not trading, those profits will be taxed as miscellaneous or other taxable income and individuals may need to complete a self assessment tax return.
- Where an employer pays an individual using cryptoassets, national insurance and income tax will apply. If the employee is on PAYE the value of the cryptoasset should be added to the employee’s earnings through payroll with any NICs and income tax deducted as appropriate.
Capital gains tax charges
Many individuals will hold cryptoassets as a form of personal investment and will only be liable to pay capital gains tax on disposal. However, individuals should be aware that the capital gains rules also apply to gains arising from cryptocurrencies acquired from activities such as mining, which are subsequently disposed of. HMRC have adopted a broad definition of disposal, which includes:
- the sale of cryptoassets for money;
- exchange for another type of cryptoasset;
- using cryptoassets to pay for goods and services; and
- giving away cryptoassets to another person.
Working out liability to capital gains tax for cryptoassets can be tricky due to their often fluctuating value. Individuals should therefore keep records of each transaction they make in order to accurately calculate their capital gains tax liability and respond to HMRC in the event of a compliance check, such as:
- the type of tokens;
- the date of disposal;
- the number of tokens disposed and retained;
- the value of the tokens in sterling;
- relevant bank statements;
- wallet addresses; and
- a record of the pooled costs before and after disposal.
Normal capital gains tax rules on allowable costs apply and individuals may deduct these when calculating their gain. Examples of this include the costs of drafting a contract for the transaction and certain transaction and valuation fees.