Holders of cryptoassets need to be
aware of the tax implications, whether they are trading or mining. Here’s the
latest HMRC guidance
Bitcoin
is probably the most well-known of cryptoassets, but the industry has come a
long way since the first open-source Bitcoin was released in January 2009. The
term cryptoassets now encompasses all types of cryptocurrencies and tokens.
An example of these digital assets is
a non-fungible token (NFT) used to confirm ownership of something that exists
only online. In March 2021, Pablo Rodriguez-Fraile sold a NFT for a 10-second
video for $6.6m (£4.8m). He had purchased it just five months earlier for
$67,000.
With such huge sums and gains
involved in the buying and selling of cryptoassets, and the volatility of the
market, how they are taxed is a serious talking point. HMRC has been producing
guidance on the topic of cryptotax since 2014, but its most substantial
guidance was only published earlier this year.
Cryptoassets manual
HMRC has made it clear that this
manual is an iteration of existing views, ‘rather than a revolution’, so it is
not surprising that there have not been any significant changes to what had
been previously published.
However, it does now include more
topics, such as difference in tax treatment for NFTs, and is in a more
user-friendly format. Its main aim is to help ‘people understand the tax
implications that can arise from transactions involving cryptoassets’.
It is important to note that the
manual is currently only guidance and there is no specific cryptoasset tax
legislation, which means taxpayers must apply the existing rules around the
taxation of more traditional physical assets.
Capital gains tax
The starting point for determining
taxation is whether the cryptoholder is trading or investing.
Generally speaking, HMRC believes
that individuals hold cryptoassets as a personal investment and as such, are
liable for capital gains tax on any profits made above the annual exemption
amount.
With such volatility in the market
over the last 12 months or so, and prices hitting a record high in April 2021,
those who sold at the top will be facing hefty tax bills. Shortly after that
peak, prices dropped significantly and some by as much as 50%. If investors
sold for a loss, this can be set off against other gains to reduce overall
capital gain.
Income tax
Should cryptoholders be buying and
selling tokens at a level that HMRC considers them to be trading, then they
will be liable for income tax instead of capital gains tax.
There is no clear-cut point at which
an individual is trading, but for tax purposes, those involved in mining and
validating transactions, or taking, and yield farming are more likely to be
treated as if they are trading.
HMRC will generally use the ‘badges
of trade’ tests as a starting point to make a decision.
Location
Another critical factor in crypto
taxation is where the assets are deemed to be located. This is not straight
forward as their very nature is that they are digital and not physically
located anywhere.
However, it is an incredibly
important point for UK resident non-UK domiciled individuals, as they generally
do not pay income tax or capital gains tax on non-UK income and profits, unless
it is later sent to the UK. Therefore, the location – or situs – of assets can
have dramatic consequences on the amount of tax to be paid by these
individuals.
The manual suggests that cryptoassets
are located where the beneficial owner is resident, meaning that if the
individual lives in the UK, then the asset is located in the UK too, and taxed
as such.
HMRC powers
The publication of the manual has led
to a renewed focus on HMRC’s information gathering powers.
It notes that under schedule 23 of
Finance Act 2011 or schedule 36 of Finance Act 2008, HMRC can request information
from crypto exchanges. It is also able to make requests through the Mutual
Legal Assistance Treaty, European Investigation Order, and General Data
Protection Regulation (GDPR).
We know from reports dating back to
August 2019, stating that UK crypto exchanges such as CEX.IO and Coinbase had
received requests for customer data and transaction histories, that this is not
a new practice. The block also quoted a spokesperson for HMRC in October 2020,
who said that ‘HMRC regularly gathers data from a range of information sources
using powers provided by parliament’.
To clarify exactly what powers HMRC
does have, Gherson Solicitors sent a Freedom of Information request to HMRC.
The response confirmed that HMRC has:
·
used powers to gather information
about customers’ transactions;
·
exercised rights to request
information from other tax administrations; and
·
received data from crypto exchanges
about their users.
The future of cryptotax
The increased regulatory focus on
cryptoassets means it is likely that the manual will continue to be developed
and could turn into the legislative framework that would clear up the
uncertainty around taxation of digital assets, such as determining investors
versus traders, and the situs of assets.
There is precedent for regulatory legislation
to be used as basis for tax legislation and it is possible that is what will
happen here.
In the meantime, HMRC is likely to
continue making use of the powers it does have to gather information from
crypto exchanges about personal investments and holdings. Therefore, if you are
in the fortunate position of sitting on gains, it is highly recommended that
you seek specialist legal advice.
See also the HMRC Cryptoassets Manual.
