Back in October 2021 it was reported that HMRC plan to send cryptoasset holders letters encouraging them to review whether they have paid sufficient capital gains tax or, if applicable, income tax on their cryptoasset holdings.

If you are one of the lucky people to have received one of these, you may be wondering whether or not it affects you, what the reporting requirements are or even what the correct tax treatment is. 

So here is a brief overview.

What are cryptoassets?

Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or electronically traded.

They operate on a decentralised ledger system.

There are several types of cryptoassets such as:

  1. Exchange tokens – these are means of payment and a popular investment, including Bitcoin
  2. Utility tokens – these provide access to goods or services and are issued by businesses 
  3. Security tokens – these provide rights or interest in a business
  4. Stablecoins – these are tokens that are pegged to something that has a stable value. This is not widely used but it is worth noting that Facebook is launching their own stablecoin which will be used on their platform for payment for goods and services such as advertising, resulting in a wider use of stablecoins in the future.

Record keeping and reporting

HMRC seek to identify those who do not comply with their tax obligations and are actively engaged with the exchanges. Tax payers will be charged substantial penalties for underpayment of tax. 

As the exchanges are electronic, tax payers have no excuse for not keeping proper records. Saying that, cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is, therefore, on the individual to keep their own records for each cryptoasset transaction.

Furthermore, transfers exceeding $10,000 need to be reported to the US authorities.

Gambling

Trading cryptoassets is not considered gambling. However, as the value is regulated by supply and demand and is, therefore, very volatile it would be advisable to invest only what you can afford to lose.

Taxation

Taxation of cryptoassets depends on the nature and use of the assets.

Cryptoassets have no physical location. Where the cryptoasset is distinct from any underlying asset, for Capital Gains Tax and Inheritance Tax, they will be taxed in the country where the beneficial owner is resident. This will create issues for non UK domiciled individuals as no remittance basis will apply even if they trade on a foreign exchange. They will, therefore, be subject to UK tax on any gains as they arise.

Profits from sale, whether or not cash is withdrawn from the exchange, will most likely be subject to Capital Gains Tax (at 10% / 20%) rather than income tax (at 20% / 40% / 45%) for individuals but there are exceptions to this:

  1. Trading – for example mining of cryptoassets (award of coin) or staking of cryptoassets (award of fees). We need to look at the badges of trade, such as risk, number of transactions and profit-seeking motif. If the criteria are met, any profit will be subject to income tax and National Insurance. 
  2. Miscellaneous income – mining and staking of cryptoassets – if this does not fall within the badges of trade, any income received will be treated as miscellaneous income and will be subject to income tax. 
  3. Airdrops – these are usually received for free, however, if these are received in exchange for services provided, they are subject to income tax.
  4. Employment income – if an employer rewards an employee in cryptoassets, the money’s worth is subject to PAYE and National Insurance.

Exchange of one type of cryptoasset for another is also a disposal for Capital Gains Tax. 

This is a complex area of tax and as cryptoassets continue to become more widely used it is necessary to seek professional tax advice on the treatment of these assets. 

By This email address is being protected from spambots. You need JavaScript enabled to view it., Manager

If you have any questions on, or are unsure of the tax treatment of cryptoassets, or would like to discuss your specific circumstances, please contact your local Thomas Westcott office.