As Cryptoassets gain in popularity it comes as no surprise that policy makers have been asked to expand on and specify guidance already in place on the treatment of such transactions.
Are Cryptoassets a currency or a capital asset? When is a transaction a taxable event?
Many are of the opinion that crypto trading or investing is not taxable until exchanged into fiat currency. The long story short is that trading in and investing in Cryptoassets can be a complicated matter and we expect more guidance to be released as the year goes on. The below highlights the main points on the taxability of Cryptoassets and the new HMRC Manual that provides more clarity on the matter.
What are Crypto assets?
“Cryptographycally secured digital representations of value or contractual rights”
The most common types of Cryptoassets are:
- Exchange tokens
- Utility Tokens
- Security Tokens
- Stable Coins
These are typically stored on a form of Digital Ledger and can be transferred, stored or traded electronically. Once the definition of Cryptoassets has ben ascertained then the treatment of these assets can be determined under the HMRC guidance. According to a Cryptoasset Taskforce Report, HMRC has determined that Cryptoassets are NOT Currency.
When are CryptoAssets Taxable?
There are two ways that an individual can be taxed on Cryptoassets.
- They are subject to income tax on their Cryptoassets
- They are subject to capital gains tax on their assets.
Compensation received in the form of Cryptoassets from your employer or customer will be treated as income and subject to income tax and national insurance contributions. This is also the case where mining and airdrops occur during trading. Where a person operates a trade buying and selling Cryptoassets this may be seen as taxable profits and subject to income tax and national insurance contributions.
I most other cases capital gains tax will apply as individuals hold the Cryptoassets in a personal capacity for the purpose of investment.
Don’t forget some of the other taxes and regulations that may be applied on to your Cryptoassets trades:
It is the ultimate responsibility of the individual to keep records of the Cryptoassets. This can be in paper or electronic form. Be wary that some platforms and exchanges will only keep records for a short time and so it is wise to keep your own separate records.
Should HMRC require more evidence of the transactions and ask you to produce your records, these must show the following information:
- the type of Cryptoassets
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in pound sterling (as at the date of the transaction)
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review
They may also ask for more evidence on how you funded the transaction to purchase Cryptoassets and so taxpayers will do well to keep records of bank deposits or withdrawal.
This area of taxation is constantly developing and we expect HMRC to have more guidance as time passes. If you are trading in Cryptoassets or holding for the purposes of investment then know that these transactions need to be reported and could be taxable. As Cryptoassets are used in criminal activity and money laundering, this area of compliance is receiving a lot of attention from the authorities.