Over the last decade, cryptocurrency (‘crypto’) has become an increasingly popular investment for individuals and companies. With some crypto’s such as Bitcoin and Ethereum surging to new highs in the past year, this virtual currency has become a mainstream commodity with reportedly over 106 million individuals using crypto. In response to this, HMRC have issued guidance manuals relating to investing in crypto but understanding how to correctly report the monies received from crypto to HMRC is not well-known, and it is important to recognise the implications of investing before doing so.
What is cryptocurrency?
Cryptocurrency can appear overly complicated, and HMRC do nothing to alter or dispel this view saying that the currency is…… “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”. This essentially means it is a digital currency which can be bought to buy other commodities. However, the crypto itself holds value which is based upon demand and can therefore significantly rise and fall, hence its volatile nature. Due to the volatility, HMRC do not consider crypto to be a currency, but is instead an intangible asset (like goodwill).
There are several types of crypto, and the HMRC definitions are as follows:
Exchange Tokens – used as a means of payment e.g. bitcoin – this is the most common form.
Utility Tokens – issued to fund development of a crypto and used as payment for goods or services offered by the issuer such as storage of tokens.
Security Tokens – gives owner rights or interests in a business e.g. ownership, repayment of a specific sum of money, or entitlement to a share in profits.
Stable coins – a less volatile form as considered to be linked to a stable value such as a government backed currency or precious metals such as gold.
Tax Treatment of Cryptocurrency – Individuals
HMRC have stated that the tax treatment of income/gains received from Crypto are dependent on the nature of the trading and therefore it will need to be considered on a case-by-case basis. For the majority of people, the gains made will be capital in nature but there are a few circumstances where income tax could be applicable.
For crypto gains to be liable to income tax, the trade must be considered a trading activity. What is considered a trading activity is not covered specifically in this article, but if the activity is considered to be ‘trading’ then any gains will be subject to income tax and National Insurance, with income tax rates as high as 40% and 45% depending on levels of taxable income.
2.Capital Gains Tax
Most individuals will be liable to pay Capital Gains Tax. Therefore, any gain made will be subject to Capital Gains Tax at a more palatable 10% or 20% (current rates for 2021/22), dependent on levels of income or any other capital gains and losses.
There are areas such as allowable costs, pooling of Tokens, lost private keys and fraud which need special consideration, however these are not fully discussed here.
Tax Treatment of Cryptocurrency – Businesses
If a company or business is carrying out activities which involve exchange tokens, they are liable to pay Corporation Tax on any gains they realise when they dispose of it.
Any trading losses can be used against trading profits in the current accounting period, previous accounting period or future accounting periods.
VAT is due on any goods or services sold in exchange for crypto exchange tokens.
However, VAT will not be due on some cases where exchange tokens are received from mining activities or where exchange tokens are exchanged for goods and services.
Despite HMRC’s effort to create detailed guidance to clarify the tax implications of investing in crypto, there is no government legislation to uphold this guidance and so crypto disposal should still be considered carefully on a case-by-case basis.
Due to the complex nature of Crypto we would suggest seeking professional advice, so do please feel free to contact us here.