Tax Implications Of Crypto: The New World

In April 2020, one unidentified bitcoin wallet transferred 161,500 BTC to another unidentified bitcoin wallet in one single transaction with the current worth being approximately $1.1 billion, making this the largest bitcoin transaction of all time. Introducing cryptoassets…

Cryptoassets (often referred to as ‘tokens’ or ‘cryptocurrency’) are digital or virtual currency/assets that are secured by cryptography which can be either transferred, stored or traded electronically.

With the increasing use and trading of cryptoassets HMRC felt it applicable to issue a cryptoassets manual in March 2021, with the latest update at the date of writing being 22 February 2022. HMRC list the main types of cryptoassets, and they include:

Exchange Tokens

Utility Tokens

Security Tokens

Stablecoins

There is much confusion that currently surrounds the taxation of cryptoassets in the UK, with the volatile nature leading many to conclude that they are treated like profit received from gambling or lottery winnings. However, this is not the case.

HMRC does not consider cryptoassets to be money or currency, instead they are viewed as an investment that is held for capital appreciation, and as such will be liable to capital gains tax when they are sold.

What taxes are individuals liable to?

Capital gains tax may be payable at a rate of either 10% or 20% on the gain, dependent on whether the individual is a basic rate or higher rate taxpayer respectfully. This is payable unless the chargeable gain is below the annual exemption amount of £12,300. This is payable when the disposal is made and must be reported on your self-assessment tax return. As with any capital gain, HMRC allows for some specific costs to be deducted when a person calculates their gain/loss.

What taxes are businesses liable to?

Similarly to individuals, a range of taxes may need to be paid by a business dependent on who is involved in the transaction and what activities it carries out. For example, if a business pays their employees in cryptoassets it will need to consider whether this constitutes a payment of employment income, and as such whether income tax and national insurance contributions will need to be made. Other taxes that a business may be liable to when carrying out activities relating to cryptoassets include capital gains tax, corporation tax and VAT.

Trading

Individuals and businesses that buy and sell cryptoassets with such frequency and sophistication, may meet HMRC’s definition of trading. In this case, Income tax and Corporation tax will take priority over Capital gains tax, with these taxes applying to any profits or losses that are made in the course of the tax year. However, as with any activity, specific factors and individual circumstances need to be considered to determine if it meets trading criteria.

Calculations of gains/losses will need to be undertaken in pounds sterling and therefore an appropriate exchange rate will need to be used at the time of each transaction. Cryptoasset exchanges may only keep records of transactions for a short period of time and therefore the onus is on the individual to keep their own record of each transaction.

Calculating liabilities may not always be as straight forward as they first appear, due to the daily volatility of cryptoassets making it difficult to accurately value disposals.

If you would like more information on the tax implications you may face on any disposals, please get in touch with Misty Nickells on 01392 241228 or email misty@griffinaccountancy.co.uk