The UK tax authority, HMRC, has published a guidance note on the tax treatment of certain cryptoassets for businesses. It focusses on exchange tokens, with the tax treatment of utility and security tokens to be addressed in future guidance. The new guidance is high-level, but broad in scope. It clarifies that exchange tokens will be treated as assets, not money or currency, for tax purposes. HMRC’s preliminary views are helpful in clarifying its approach to businesses involved with cryptocurrencies and other exchange tokens.
What has happened?
HMRC has published a guidance note on the tax treatment of transactions involving certain cryptoassets undertaken by companies and other businesses. This follows equivalent guidance for individuals that was published in December 2018. Tax treatment has been one of a number of areas of uncertainty surrounding cryptoassets.
Focus on “exchange tokens”
The guidance is focussed only on the tax treatment of exchange tokens, which HMRC defines as tokens intended to be used as a method of payment (for example cryptocurrencies like bitcoin). HMRC explains that “typically” there is no person, group or asset underpinning an exchange token and, unlike utility or security tokens, exchange tokens do not provide any rights or access to goods or services.
HMRC confirms that the tax treatment of utility and security tokens will be addressed in future guidance.
High level but broad scope
The new guidance is high level, but broad in scope. For example, it deals with the treatment of exchange tokens under the tax rules on trading, loan relationships, intangible fixed assets, chargeable gains, employment taxes, VAT and transfer taxes.
Exchange tokens are assets, not money, and taxed accordingly
In the guidance, HMRC reiterates its view that, although exchange tokens are assets, they are not money or currency. The tax consequences largely follow from this (although HMRC emphasises that it will consider each case on the basis of its own facts and circumstances). For example, the guidance explains that:
- Sterling values must be established: The calculation of taxable profits must be carried out in sterling and therefore, if a transaction does not have a sterling value (for example if bitcoin is exchanged for ether), an appropriate exchange rate must be used.
- Existing rules determine whether an activity amounts to a trade: In order to determine whether activities concerning exchange tokens (including mining activities) amount to a “trade”, the normal tests apply. A detailed facts and circumstances test will therefore be required.
- Capital gains tax could apply on disposals: If an activity is not a trading activity, and it is not charged to corporation tax in another way (such as under the non-trading loan relationship or intangible fixed asset rules), any gain that arises on a disposal of an exchange token will typically be charged to corporation tax as a chargeable gain. In calculating this gain, normal capital gains principles (such as those relating to allowable costs and the pooling rules) will generally apply. There is specific guidance on the implications of hard forks and airdrops.
- Exchange tokens do not constitute loan relationships: On the basis that exchange tokens are not money or currency and there is typically no counterparty standing behind the token (so there is no debt), in HMRC’s view exchange tokens do not themselves constitute “loan relationships”. However, the loan relationship rules would apply if exchange tokens are used as collateral security for an ordinary loan of money.
HMRC’s preliminary guidance should help clarify its approach to businesses dealing in or holding exchange tokens. The guidance to come on utility and security tokens will be eagerly anticipated.