Cryptoassets: Tax Treatment: At a glance

How do you tax Bitcoin? Are cryptocurrency or cryptoasset gains or profits, taxable? Can you obtain tax relief if you make losses on Bitcoin? 

Subscribers see How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?

This is a freeview 'At a glance' guide to how cryptocurrencies and cryptoassets are taxed in the UK.

At a glance

HMRC has confirmed in its Cryptoassets manual that:

• Most individual investors will be subject to Capital Gains Tax (CGT) on gains and losses on cryptoassets.
• Section 104 pooling applies, subject to the 30-day rule for 'bed and breakfasting' with different rules for companies.
• It will be rare for investing in cryptoassets to be trading, though 'mining' is likely to indicate a trading activity.
• Some crypto income may be taxable as miscellaneous income meaning that the Trading Allowance can apply.
• A capital loss may be claimed in the event that a cryptoasset becomes of negligible value. 
• Exchange tokens such as Bitcoin are located for tax purposes wherever the beneficial owner is resident.  
• VAT may need to be considered.
• HMRC does not consider cryptoassets to be currency or money.

Overview 

What is a cryptoasset or cryptocurrency?

There many different types of cryptoassets. 'Cryptocurrencies ' such as Bitcoin (BTC) are just one variation. 

A cryptocurrency is a type of cryptoasset which shares many similarities with other currencies.

• You have fluctuating exchange rates that are driven by the market.
• You can buy and sell it in exchange for other cryptocurrencies or for fiat currencies e.g. pounds, euros or dollars.
• Most cryptocurrencies use blockchain technology and some are built around different platforms.

How to tax profits or gains made on cryptocurrency: individuals

• Whether your profits are taxed as income or capital gains depends on whether you are trading or investing.
• Generally, disposal proceeds are taxed as capital gains unless there is evidence of trading.

Trading or investment?

• If you are actively mining BTC, or you are a dealer making multiple trades you may be treated as trading.
• If you are buying and holding and then selling according to market conditions, you are investing and your gains or losses will be taxed as capital.

The key test to determine if you are trading for tax purposes is to apply the Badges of Trade. 

If your gains on disposal are taxed as capital, section 104 TCGA pooling will apply.

• You should obtain tax relief on the direct costs of buying and selling the cryptocurrency investment.
• You may offset your annual Capital Gains Tax (CGT) exemption if it is unused elsewhere. 

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?

Deduction of costs

s.38 TCGA deals with Deductible expenditure for CGT purposes and applies to cryptoassets that are subject to CGT.

HMRC’s view is that deductible costs will include:

• The amount originally paid for the asset.
• Transaction fees paid for having the transaction included on the distributed ledger.
• Costs of obtaining a valuation to be able to calculate gains or losses and some professional and exchange fees.

CGT Share pooling

• Under section 104 TCGA 1992 each type of cryptoasset is kept in a separate ‘pool’, the 'section 104 pool' and the usual share pooling rules apply to disposals and Part disposals.
• The 'same day' and '30 day' rules at section 105 TCGA set out how to deal with acquisitions and disposals of a particular token on the same day and within 30 days and how and when pooling should occur. These are the same rules as for shares and securities, there are no special provisions for cryptoassets.

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK? for HMRC share pooling examples. 

Location of exchange tokens such as BTC

The location of exchange tokens such as BTC is primarily relevant for Non-domiciled individuals using the Remittance basis and for Inheritance Tax (IHT) purposes. 

• For CGT except where there is an underlying asset, HMRC consider whenever an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK. 
• For IHT the location of cryptoassets depends on the same general principles as for other types of assets, subject to any specific provision in a double tax treaty. See Non-domicile status, deemed domicile & tax

How to tax profits or gains made on cryptocurrency: Businesses

A business is liable to pay tax on activities they carry out which involve exchange tokens, such as:

• Buying and selling exchange tokens.
• Exchanging tokens for other assets including other types of cryptoassets.
• Mining.
• Providing goods or services in return for exchange tokens.

HMRC have identified several ways in which exchange tokens might be subject to Corporation Tax including:

• Trading income (see below).
• Loan relationships.
  • HMRC do not consider exchange tokens to be money or currency, so the rules do not apply except where tokens are used as collateral for loans.
• As intangibles (see below).
• As investments i.e. chargeable gains (see below).

For tax return purposes non-sterling cryptoassets must be converted into sterling.

Taxed as trading income

As for individuals, the question of whether a trade is being carried on is key and the Badges of Trade apply. Relevant factors include:

• Degree and frequency of activity.
• Level of organisation.
• Intention including risk and commerciality.

If a business’s activities amount to a trade, the receipts and expenses form part of the calculation of trading profit.

Taxed as intangible assets

Companies that account for exchange tokens as Intangible assets may be taxed under the Corporation Tax (CT) rules for intangible fixed assets if the token is both:

• An ‘intangible asset’ for accounting purposes.
• An ‘intangible fixed asset’ that has been created or acquired by a company for use on a continuing basis. 

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?

Taxed as investments (chargeable gains)

• If a company or corporate member of a partnership holds exchange tokens as an investment, they must pay CT on any gains realised on disposal. 
• If a sole trader or individual partner holds tokens as an investment, they must pay CGT on any gains they realise.
• If a company realises a capital loss on the disposal of exchange tokens, this can be used to reduce an overall gain on total capital disposals. Special rules apply if the loss-making disposal is to a Connected person.
• There are special rules for gifts to other companies not in the same group and gifts to charities.

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?

Deduction of costs

• The rules here are the same as for individuals, see above.

CGT Pooling

• The pooling rules apply for companies as for individuals, with two exceptions. See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK? for what these exceptions are.

Other areas to consider

Mining activities

HMRC's view is that:

• Whether mining activities amount to trading depends on the degree of activity, organisation, risk and commerciality. For example, mining using an already owned home computer is unlikely to be trading. 
• If the miner keeps the awarded assets, they may have to pay CGT or CT on chargeable gains on future disposals.

Where mining is a trading activity the exchange tokens form part of trading stock and normal trading rules about transfers to and from stock apply. See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?

Record-keeping 

Cryptoasset exchanges may only keep records of transactions for short periods. The onus is on the taxpayer to keep their own records for each transaction in case of HMRC review or enquiry. 

Stamp Duty, Stamp Duty Reserve Tax (SDRT) and Stamp Duty Land Tax (SDLT)

HMRC will consider on a case-by-case basis whether a transfer of exchange tokens meets the requirements for Stamp Duty or Stamp Duty Reserve Tax to apply. 

HMRC consider that Stamp Duty Reserve Tax will apply if tokens are given as consideration for purchases of ‘chargeable securities’. The same applies for Stamp Duty Land Tax (SDLT) if tokens are given as consideration for a purchase of land.

Employment reward

• If an employer awards cryptoassets, they are taxable as employment benefits. If provided by a third party the Disguised remuneration rules at part 7A of ITEPA 2003 may apply.

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK? for how to tax cryptoassets as employment reward and the difference between readily convertible assets (RCAs) and non-RCAs.

VAT

The HMRC Cryptoassets manual states:

• VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.
• Exchange tokens received by miners for their mining activities will generally be outside the scope of VAT.
• When exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself.

HMRC powers

See How are Bitcoin, cryptocurrencies or cryptoassets taxed in the UK?