Back in April 2018, we wrote about the taxation of cryptocurrencies from a corporate tax and VAT perspective. At that point it was clear that there was a degree of ambiguity concerning the tax treatment of cryptocurrencies; effectively because there was no (and arguably could not have been) anticipation of cryptocurrencies and how they should be taxed at the time the current laws which deal with taxation were initially drafted and enacted.
There is still a degree of ambiguity over how cryptocurrencies should be taxed. However, HMRC have released guidance on the taxation of "cryptoassets" for UK resident individuals which, whilst not legally binding, provides an indication of how they expect individuals to be taxed where they transact with "cryptoassets". HMRC state that they will "publish further information about the tax treatment of cryptoasset transactions involving businesses and companies" in due course and we eagerly await this.
Cryptocurrencies or Cryptoassets?
In the meantime, we thought it useful to revisit what cryptocurrencies are, and to review HMRC's new guidance on the taxation of individuals.
Simplistically, cryptocurrencies are cryptographically secured digital representations of value or contractual rights which can be either transferred, stored or traded electronically. All cryptocurrencies use a form of "distributed ledger technology", such as Blockchain, and broadly three types of cryptocurrencies can be identified:
- exchange tokens (such as Bitcoin, which are intended to be used as a form of payment);
- utility tokens (these may provide the holder with access to particular goods or services on a platform); and
- security tokens (which may provide the holder with particular interests in a business).
As set out in our previous article, cryptocurrencies can generally be "mined" by individuals (by solving cryptographic algorithms), "traded" with other currencies, used to purchase goods and services (where payment in this form is accepted), and (perhaps most controversially) can offer investment opportunities themselves. HMRC have only considered the taxation of exchange tokens in their guidance, noting that for utility and security tokens their guidance contains "starting principles" only and that different tax treatment may be adopted in reality.
It is worth nothing that HMRC do not consider cryptocurrencies to be currency, or money – a position adopted in the Cryptoasset Taskforce report. As such, and perhaps reflecting this, HMRC refer to such exchange, utility and security tokens as "cryptoassets", a term we will also adopt.
We have set out below some of the key points from HMRC's guidance.
Cryptoassets are not considered to be currency, or money, and as such they cannot, for example, be used to make a tax relievable contribution to registered pension schemes. However, they do constitute assets and as such can be within the scope of inheritance tax (as a form of "property") as well as other taxes where, for instance, they are received through employment or individuals buy and sell them for profit.
HMRC have clarified that they expect individuals to be liable, in most cases, to capital gains tax ("CGT") where they dispose of cryptoassets. This is because individuals will generally hold cryptoassets as investments with the aim of capital appreciation in the value of the asset. Exceptionally, however, individuals may be liable to income tax ("IT") where they buy and sell cryptoassets with such frequency, level of organisation and sophistication, that the activity amounts to a financial trade in itself. In such a case IT takes precedence over CGT. CGT treatment is likely to be preferable to IT treatment because (for the tax year ending 5 April 2019) the top rate of CGT (for higher or additional rate taxpayers) is 20%, compared to 45% for IT (for those earning over £150,000 per annum).
Where individuals receive cryptoassets from their employer (as remuneration), they will be liable to pay IT and national insurance contributions ("NICs") on the value of such assets. In particular, pitfalls will need to be avoided where corporate entities remunerate their UK employees with exchange tokens (such as Bitcoin). In such cases, where exchange tokens constitute "readily convertible assets" and the employer is unable to deduct the IT and NICs on payroll (because the employee monthly salary is not large enough to take the full deduction) then employees will be liable to reimburse the employer for such tax within 90 days of the end of the tax year (the employing company will itself have to pay HRMC direct for the tax, as opposed to through payroll). If the employee does not reimburse the employing company within this time, punitive tax charges can arise.
HMRC note that individuals are also liable to IT and NICs in respect of cryptoassets they receive from "mining" and on any fees or rewards they receive in return for mining. "Mining" typically involves using computers to solve mathematical problems in order to generate new cryptoassets.
IT may also be payable where individuals receive cryptoassets through "airdrops", which is where someone receives an allocation of tokens or cryptoassets, for example as part of a marketing campaign where people are selected to receive them. However, IT should not apply if such cryptoassets are received by a person who does not have to do anything in return for the asset, and where they are not received as part of a trade or business involving cryptoassets or mining.
A key recommendation is for individuals buying and selling, or otherwise receiving, cryptoassets, to keep and preserve records for each cryptoasset transaction (such as the type of cryptoasset, date of transaction, volume sold/bought/received, value, and information on bank statements or wallet addresses). As many cryptoassets are traded on exchanges where pound sterling is not necessarily used, records should also be kept of conversion values and methodologies.
HMRC have again noted that the tax treatment of cryptocurrencies will continue to develop because of the evolving nature of the underlying technology. As such, HMRC are holding their right to "look at the facts of each case and apply the relevant tax provisions according to what has actually taken place (rather than by reference to terminology)". Whilst this is a sensible approach from the perspective of the tax authorities, it does mean that there remains and continues to be a sense of ambiguity over how cryptocurrencies should properly be taxed. This is arguably inevitable given the fast-moving and evolving use of cryptoassets and the underlying technology on which they are based.
We recommend any person participating in cryptoasset transactions, or any company remunerating employees through cryptoassets, to seek advice as to the potential taxation implications. We eagerly await HMRC's clarification on the tax treatment of cryptoasset transactions involving corporate entities and will set out our views when this is available.