HMRC published its cryptoassets manual on 30 March 2021, which expands on and replaces previous guidance. For context, the first decentralised cryptocurrency, bitcoin, was released as open-source software in January 2009. In the last five years, the market capitalisation of bitcoin has increased from approximately $6.5bn to $1tn. In this way, the cryptoassets manual is a timely update and formalisation of HMRC’s guidance as the market expands. Since cryptoassets are a developing area of law, any event potentially triggering a tax liability should be considered individually. However, it is possible to highlight some key principles from the manual for businesses.
- Trading: the use of cryptocurrencies as a form of exchange (exchange tokens) (be it for other cryptoassets, money or goods and services) may be done in the course of a trade, meaning that corporation or income tax liability may arise. The value of any gain or loss needs to be converted into sterling in order to fill in a tax return. Mining activity (where miners verify transactions in exchange for payment in cryptoassets) may also amount to trading depending on the extent of the activity.
- Chargeable gains: HMRC considers exchange tokens to be chargeable assets to the extent they are capable of being owned and having a value that can be realised. Thus, if a taxpayer holds exchange tokens as an investment, they will be liable to pay CGT or corporation tax on any gains when they make a disposal.
- Employment tax: employees receiving cryptoassets as earnings are liable to income tax and NICs on the sterling value of the assets received. Given the employer’s inability to withhold, it may be for the employee to make good the relevant deductions.
- VAT: businesses supplying goods and services in exchange for cryptoassets are liable to account to HMRC for VAT for the sterling value of the exchange tokens at the point the transaction takes place.
- Stamp taxes: stamp duty is charged on instruments that transfer “stocks or marketable securities”. HMRC's view is that exchange tokens are unlikely to meet the definition of “stock or marketable securities”. Where other assets are sold for consideration consisting of exchange tokens, stamp duty or SDRT would be chargeable on the sterling value of the consideration.
Since HMRC does not consider cryptoassets to constitute money or currency, transactions involving cryptocurrency are not taxed in the same way as transactions in sterling or foreign currency. Instead it is necessary to apply general principles to establish whether they have made a gain or a loss. Given the volatility of cryptoassets, the sterling value of a tax charge could vary significantly from one day to the next, depending on the date on which the tax charge was crystallised.
What does the future hold for blockchain?
Whilst we are on the subject, various commentators have noted the potential applications of the underlying technology used in cryptocurrencies - distributed ledger technologies (DLT) - in the legal sector. DLT offers a secure, real-time record of transfer and ownership using unique identifiers without an intermediary such as a bank or company secretary. Such record-keeping could be used for any asset, not just currency. The decentralised nature of DLT will raise legal questions about, for example, the location of the ownership record and therefore the location of virtual assets, which can be crucial for understanding in which jurisdiction a tax liability has arisen – as we recently discussed. However, if such legal questions can be addressed, businesses may have the certainty they need to innovate. One application could be smart contracts, whereby the fulfilment of an obligation by one party can be incontrovertibly recorded on DLT (for example, the transfer of payment) and therefore automatically trigger the performance of another obligation by another party (for example, the dispatch of goods) without any other intervention. A more ambitious application could be putting a land registry or a tax database on DLT, the impact of which would be hard to understate – if it could be achieved.