Taxation of Cryptoassets
In the UK, the possession and transactions involving cryptoassets are subject to taxation under the same existing tax laws that apply to other assets.
Due to the increasing popularity of cryptoassets and the growth in value of the cryptoasset market, HMRC now maintains an Internal Manual that outlines how transactions involving cryptoassets are treated.
In November 2023, HMRC released guidance on how taxpayers should disclose unpaid tax arising from income and gains derived from cryptoassets.
HMRC states that the treatment of “all types of tokens is dependent on the nature and use of the token and not the definition of the token.” Owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activity.
Nature of Cryptoassets
HMRC defines cryptoassets, frequently called ‘tokens’ or ‘cryptocurrency,’ as ‘cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically’ and lists the main types as:
- Exchange tokens refers to cryptocurrency such as bitcoin.
- Utility tokens provide access to particular goods or services on a platform.
- Security tokens provide rights or interests in a business, such as ownership, repayment of a specific sum of money or entitlement to share in future business profits.
- Stablecoins derive their value from being attached to something with a stable value such as fiat currency (money such as pounds sterling or US dollars) or precious metals such as gold.
Taxation of Cryptoassets on Individuals
HMRC considers that, in the vast majority of cases, individuals hold cryptoassets for capital appreciation or acquire them to make particular purchases.
Income tax and National Insurance Contributions
Liability will arise in respect of cryptoassets received from:
- an employer as a form of non-cash payment, as they are regarded as ‘money’s worth’
- mining, transaction confirmation or airdrops. ‘Mining’ typically involves solving difficult mathematical problems to generate tokens and such activity may amount to a taxable trade, as defined.
- staking, which may amount to a taxable trade.
- airdrops, where someone receives an allocation of tokens, which are provided in return for, or in expectation of, a service.
Capital Gains Tax
Tokens are regarded as ‘chargeable assets’ when they are both:
- capable of being owned and
- have a value that can be realised.
A potential liability for Capital Gains Tax will arise upon:
- the sale of tokens,
- exchange of tokens for a different type of cryptoasset,
- use your tokens to pay for goods or services,
- gift of tokens to another person (unless by way of a gift to a spouse or civil partner),
- a gift of tokens to charity.
Inheritance Tax
Cryptoassets are regarded as property for the purposes of Inheritance Tax. The location of the assets will need to be determined for non-UK domiciled taxpayers.
The application of any relevant Double Tax Treaties is to be taken into account. If there are no relevant treaties, the common law analysis should be applied.
Location of the Cryptoassets
The location of the cryptoassets is important in cases involving:
- non-UK domiciled individuals. They may be eligible to use the remittance basis while UK resident, meaning that any foreign income and gains would only become taxable if they were brought into the UK.
- taxpayers who need to disclose previously undeclared income and capital gains.
HMRC states that, for Capital Gains Tax purposes, the token is situated where any underlying asset, represented by the token, is located. If there is no underlying asset, the asset’s location is based on the tax residency of the individual owning it.
Records which must be produced
When accounting to HMRC in respect of any tax payable arising from every transaction, it will require evidence of:
- type and number of tokens disposed of,
- date of disposal,
- number of tokens retained,
- value of the tokens in pound sterling,
- bank statements and wallet addresses,
- a record of any pooled costs.
The value of any gain or loss must be reported in pound sterling on a Self-Assessment tax return. If the transaction does not have a pound sterling value, an appropriate exchange rate must be established for such conversion into pound sterling and details of the manner of conversion must be produced.
How Can We Assist?
The rapid and ongoing increase in cryptocurrency-related activities demands constant attention and careful consideration of all the implication which arise.
HMRC aims to stay updated on these challenges and offer relevant and helpful advice from time to time. However, it acknowledges that its position and guidance may change over time.
The Team at KANGS regularly advises clients on commercial and tax disputes concerning cryptocurrency https://www.kangssolicitors.co.uk/services/financial-investigations/cryptocurrency-investigations-disputes/.
Our Criminal Team offers considerable experience gained from defending clients charged will alleged criminal activity on the crypto market.
If we can be of assistance, we would be delighted to hear from you, simply contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.
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