A decade ago, Bitcoin was the first thing that came to mind when hearing the term, crypto asset. Today, the digital currency market has evolved and revolutionised into something much bigger. Crypto asset investors and businesses need to keep themselves updated with accurate information regarding the latest rules and regulations surrounding cryptocurrencies and the corresponding tax treatments, in order to invest and profit wisely.
HMRC has introduced various tax treatments surrounding crypto assets, over time, due to the evolving nature of the industry, further treatments and rules will be developed to address the changing needs. You should lookout for the latest updates from HMRC as they constantly develop new rules and regulations around this rapidly changing domain.
Common Questions About Crypto Assets Tax Treatment in the UK
If you run a business and have been trading or mining crypto assets, some questions that may have arisen in your mind must include:
How are my cryptocurrency gains going to be taxed?
Will I be responsible for paying Capital gain tax on profits I make from crypto assets?
Or can I gain tax relief on the cryptocurrency gains?
It is crucial for businesses in the UK to note that crypto-assets can be taxed in a variety of ways depending on how you invest in them and the purpose you hold them for, such as investment, trading etc.
But first,
What Are Crypto Assets?
Crypto assets are digital assets that hold a part in your balance sheet; however, defining the correct category for such assets is challenging. The term crypto asset is preferred over cryptocurrencies because banks and governments do not recognise currencies like Bitcoin as money. These currencies are viewed as types of tokens which mainly include:
- Exchange tokens
- Utility tokens
- Security tokens
However, HMRC has mainly touched upon exchange tokens for now. Therefore, the exchange token holds value and can be used as a source of exchange and investment for your business.
Which Taxes Can Apply?
If you use exchange tokens to carry out your daily business activities, then taxable activities will include:
- The purchasing and selling of exchange tokens.
- Trading tokens for other assets.
- Crypto Mining.
- Selling goods and services for exchange tokens.
While these activities are taxable, the types of taxes will rely on who is engaged in the business and how they are carried out.
These include:
- Corporation tax
- Capital gains tax.
- Income tax and National insurance contributions
- VAT
- Stamp Duty Taxes
The Declaration to HMRC
Once you calculate the amount of tax your business is liable to pay, you will have to declare the annual returns to HMRC through either:
- Self-assessment tax returns for particularly sole proprietors and partnerships, or
- Company tax returns for companies
This is where HMRC will consider your case and determine the correct tax treatment according to relevant laws.
Paying with Crypto Assets
It would be best to keep in mind that every crypto asset transaction taken as a source of payment should be recorded in the functional currency, the sterling pound in case you are in the UK. Even if the transaction is not made in sterling value, a reasonable exchange rate must be established to convert to sterling pound.
The value of gains and losses will be recorded in pounds so that your business can file its tax returns in the proper way. An appropriate measure will be taken to ensure that an accurate valuation methodology is followed and kept consistent throughout.
Two essential tips that you must follow are:
- The recording value of your crypto asset must correspond with the transaction time so that tax returns are filed according to the official currency value.
- You must also remember to represent the crypto assets in your balance sheet at the year-end in pounds sterling as the value will be a representative figure when filing tax returns.
It is also advisable to talk to our expert crypto-asset accountants, who can help you file the right amount of taxes to align your business practices with HMRC’s requirements and further updates.
Ways in Which Corporation Tax is Applied to Exchange Tokens
Tax treatment will vary for each type of business to ensure that appropriate tax treatments are made. There are several ways in which exchange tokens may be subject to corporation tax.
Taxable as Trading Income
An essential factor to consider when making a tax analysis is whether a trade is taking place. This will guide you to determine the correct tax treatment for your trading income.
Be it buying or selling of exchange tokens; the trade will depend on the degree and regularity of activity, the intention of trade, and the level of your business.
If your business activities result in trading, your income and expenses will calculate to form the trading profit. Regarding a sole proprietor or a partnership, the tax will be charged on the sole trader’s income and trading profit for the partnership. Alternatively, if exchange tokens are accepted as payment by a company, and the company gains profit or returns over it, then a corporation tax will apply.
It’s also important to consider other legislation that may apply to business activities that do not amount to trade.
Mining
Crypto mining is the process of gaining cryptocurrencies through the process of blockchain.
HMRC has provided a reasonable amount of guidance regarding mining activities.
These include:
- If you use a personal home computer to mine cryptocurrencies, it is not likely trading. The income from successful mining will be taxable as a miscellaneous income, and appropriate expenses can be charged.
- If you purchase a set of computers and dedicate them to mining tokens for an expected profit, then that would most probably account for trading. In this case, your business profits will be charged tax according to the applicable tax rules.
- In the case of cryptocurrency holdings, the awarded assets, you will have to pay a corporation tax or capital gains tax on the gains of the crypto asset at the time of disposal.
The exchange tokens will be held as a part of your business stock if mining is a trading activity. If the tokens are transferred into investments, then the profit and loss will be calculated, and relevant tax laws will apply.
Similarly, if exchange tokens are first held as investments and are then transferred into the trading stock, the tax charges will apply when the exchange tokens are sold and not just when the asset is declared to be sold.
Tax Under Loan Relationship Rules
Your business will only establish a loan relationship if it lends or borrows money, meaning if you are in debt or hold someone in debt. According to the government’s rules, exchange tokens are not considered as money or even currency; thus, loan relationship rules do not apply to exchange tokens if you acquire exchange tokens when the token is not backed up. Additionally, a loan relation does not apply if you loan exchange tokens rather than original currencies as there will neither be a money debt nor an official transaction of lending.
However, some cases fall under the exception; if you provide exchange tokens as collateral security for a loan, then a loan relationship applies, and the rules will be enforceable, regardless of being a debtor or creditor.
Tax on Intangible Assets.
If your business holds exchange tokens as intangible assets, these intangible fixed assets will be charged a corporation tax if the tokens are both:
- An intangible asset for accounting functions
- An intangible fixed asset for use continuously. Exchange tokens that are just held by your business or simply held while other activities take place will not fall under this category.
Tax on Investments.
Exchanged tokens are cryptocurrencies; therefore, they are intangible and digital, but they do count as a chargeable asset for either Capital gains tax or corporate tax if they have:
- The capability of being owned.
- A value that can be realised.
If you run a company and hold exchange tokens as an investment, you will be liable to pay corporation tax on the gains realised only at the time of disposal. The chargeable gain rules will most probably apply to your business if the other treatments mentioned above have not been applicable.
In another case, if your business functions as a partnership or LLP and you hold exchange tokens as an investment, then you and your partners will be liable to pay capital gains tax on any gains you realise.
Similarly, as a sole proprietor, you will be liable to pay capital gains tax on the gains you realise over holding exchange tokens as an investment.
The term disposal has been used quite many times, and it’s important to know what it refers to.
Disposal includes:
- Selling exchange tokens in return for money.
- Trading exchange tokens for a different type of crypto asset.
- Utilising exchange tokens to compensate for goods and services.
- Simply giving the exchange tokens away to another person.
Provided that your business faces a capital loss on the disposal of exchange tokens, this would reduce your overall gain on capital disposals, helping you pay a lower tax on the net gains. However, this is only permissible if HMRC is informed about the treatment in advance and received acceptance.
If your company gives exchange tokens away to another company, this must be handled as the disposal equals market value, and chargeable gains will be calculated and taxed accordingly.
In another situation, if your company gives away exchange tokens to charity, you will not be legally responsible for paying corporation tax on any gains. This will not apply if:
- You have made a tainted donation, where you have obtained a financial advantage over the charity.
- Your company has disposed of the tokens at a value that is more than the acquisition cost meaning that you have released gains over it.
Deduction of Costs
As mentioned previously, where your business decides to dispose of the exchange tokens held as investments, tax relief can be obtained on the direct costs of acquiring and trading of assets that include:
- The initial payment made for the asset.
- The transaction fee charged before the transaction is valued in the blockchain.
- Advertising costs for purchaser
- The professional costs to form a contract for buying or disposing of the exchange tokens.
- Costs of valuations to calculate the gains and losses.
You must be careful while representing allowable costs. The costs of mining activities will not be allowable because they are not incurred entirely to acquire exchange tokens. If your business trade depends on the mining activity, then a possibility may arise to deduct some costs from your trading profits.
Pooling
Pooling makes tax calculations easier for shares, securities and other assets which are dealt with disposing upon the nature of the assets rather than each particular asset. Exchange tokens fall within this description; therefore, they should be pooled.
You may keep each type of exchange token in a pool and track gains and losses relatively. For example, if you own bitcoin and ether, these two will be looked upon as pools with the relative pooled allowable costs. Any changes that you make by acquiring or disposing of exchange tokens will affect the pooled allowable costs. It is essential for you to keep an updated record of each type of exchange token along with the allowable costs for each pool so that accurate gains and losses can be calculated.
Exceptions
The pooling rules will apply to your business with basic two exceptions:
- If you acquire exchange tokens on the same day you dispose of the same type of tokens (regardless of disposals taking place first), the disposals will be matched with the acquisitions made on the same day in priority to the existing tokens in the pool.
- For the case where your business acquires tokens and pools them but disposes them within 10 days of acquiring, the disposal will be matched with the acquisition within the last nine days on a priority basis to the tokens already being held in the existing pool. And if you have acquired tokens more than once within the period, then the ‘first-in, first-out basis will apply.
While your exchange tokens are pooled, any negligible claim must be made to the entire pool and not just the individual tokens. The negligible claim is only possible if your business holds exchange tokens with negligible value, and so the treatment must be made when disposing and reacquiring such assets. You must report the disposal loss to HMRC along with the negligible value claims.
The claim must state:
- The asset’s subject to the claim
- The value of the asset that will be disposed of (possibly to value £0)
- The date that the asset will be treated as disposed of.
Blockchain Forks Taxation
Blockchain forking is a division in the blockchain network.
There are two types of forks:
- Soft fork
- Hard fork
A soft fork is only an update on the blockchain. Therefore, taxes do not apply to soft forks as no new coin is added to your wallet.
In contrast, a hard fork is where your cryptocurrency splits into more branches, and you receive new coins. This is where your gains will be taxable.
Airdrops Taxation
You will be affected by airdrop taxation if you use tokens or any other crypto assets for marketing or an advertising campaign. An airdropped crypto-asset usually holds its own infrastructure. This may include a blockchain, a smart contract or any form of ledger technology that operates apart from the existing crypto assets.
Similar to the pooling process discussed above, your business’s airdropped crypto assets will be assigned to their new pools (otherwise will go to the existing pools). Here, taxation on chargeable gains will not apply to your airdropped crypto assets if it is not derived from an existing pool of crypto assets.
Stamp Duty/Stamp Duty Reserve Tax
Stamp duty will be charged to your business’s stocks or marketable securities, and a stamp duty reserve tax will apply to the agreements on transferring chargeable securities. You must note that HMRC will be looking upon a case-by-case basis to recognise your exchange tokens and charge them according to the stamp duty or stamp duty reserve.
Initially, HMRC had published that exchange tokens would not meet the criteria to be taxed under this category because exchange tokens were not recognised as money. And so, if you make a payment through tokens for purchasing stocks or marketable securities, stamp duty will not be charged. HMRC has now stated that exchange tokens do hold a ‘money worth’ in some cases; therefore, stamp duty reserve tax liabilities will apply in the case if you make consideration for purchasing ‘chargeable securities’.
VAT On Crypto Assets
A few latest updates suggest, that VAT will be due on crypto assets when:
- Goods and services are charged an amount of VAT in exchange for money, the exchange of crypto-asset tokens for goods and services will be charged similarly.
- The goods or services supplied should be charged VAT in the pound sterling value of the exchange tokens at the time of transaction.
Crypto assets must be treated as:
- If miners receive exchange tokens for their job (mining activities), VAT will not be charged.
- You will not be liable to pay VAT on the supply of exchange tokens when the token is exchanged for goods and services.
- Any charges that you will have to pay for the transaction of exchange tokens to meet the requirements, above the exchange tokens value will be exempted from VAT as well.
Venture Capital Schemes and Taxation
Venture capital schemes do not hold any specific crypto asset conditions. Thus, crypto assets will be reviewed in the same way as for any other business.
Your business will qualify under the venture capital scheme if:
- You are selling goods and services which operate in the mining sector or similar exchange tokens sector.
- You accept exchange tokens as a form of payment in trade.
- Your business uses a distributed ledger technology to record or publish information.
If your business’s core activities qualify as trade, then the usual treatment of exchange tokens will be applied as understood above.
However, the same treatment may be uncertain about applying to some activities such as:
- If you are dealing with exchange tokens from your personal account
- In the case of mining exchange tokens
- If you are broking exchange token operations
It is essential to carefully consider such sensitive and excluded activities while trading to guarantee that your business does not function against the scheme’s conditions.
Varied activities, which combine real currency and cryptocurrency to make a payment, should also be considered as this would include real currency in the transaction, and a chargeable gain will apply on disposal or investing (of the crypto asset).
Payments Made to Employees in Crypto Assets
Some essential factors to remember as an employer include:
- As an employer, if you pay your employees in crypto assets, the employment benefits will be taxed.
- If a third party pays your employees, then, in that case, the remuneration rules of ITEPA will apply.
- your exchange notes will be subject to class 1 NIC and PAYE if they are readily convertible assets.
- If they do not fall under the category of readily convertible assets, your employees will be liable to declare the amount received on their self-assessment tax returns and pay the taxable amount to HMRC. You must also treat this payment as a ‘benefit of a kind’ and record any Class 1A NIC correspondingly.
You must note how you cannot contribute exchange tokens to your employees’ pension schemes as HMRC does not consider crypto assets as money or currency.
Possible Tax Reliefs for Crypto Trading
Be it individuals or businesses; everyone looks forward to minimising tax payments and benefit from tax reliefs. You can benefit from a wide range of tax reliefs if certain conditions are met. These include:
- Enterprise investment scheme
- Seed enterprise investment scheme
- Venture capital trust scheme
- Reliefs for gifts of business assets
- Business property relief
It would be best to understand that these tax reliefs do not mainly cater to crypto assets. You may further make use of the non-statutory clearance service and get guidance from HMRC or contact our expert Accountants in London to help you out with specific queries regarding tax reliefs to ensure that you save up on your tax bill to the maximum.
What to Look Forward While trading in Crypto assets?
With a particular understanding that cryptocurrencies and assets are undoubtedly on the rise, you must keep an open eye for what HMRC’s next steps will be. The idea of cryptocurrency may have started as a non-regulatory currency, but necessary safeguards and regulations will be made by the government of the UK to restrict any fraudulent practices to ensure that your business is carried out in the safest means. Therefore, it is important to stay updated and awake for new crypto asset taxation policies which may directly or indirectly affect your business and get expert advice from a crypto tax accountant in the UK.