The Taxing Of Cryptocurrency
If you, like so many others around the world have dipped your toes into the exciting world of cryptocurrency recently, it’s more than likely you found yourself wading through crypto-news articles
and research before making that big jump towards investment. Whilst you might associate this highly technical development with the likes of financial professionals or web extraordinaires, part of the beauty of this phenomenon is it’s extremely diverse popularity. If you delve into the world of rap music for moment, you’ll find that grammy nominated Akon is behind the building of a 100% cryptocurrency-based city in Senegal
, as part of a wider initiative to help African countries build their own economies and communities. Something not every musician could accredit themselves.
What is Cryptocurrency?
Cryptocurrency is primarily centred around the extremely secure, digital, transfer of a currency holding value. Just like fiat currencies, there are a number of different crypto ‘coins’ or ‘units’
in the cryptocurrency market each of which holding their own unique benefits and of course, popularity amongst investors. The idea behind digital money, or cryptocurrency has been around for a lot longer than you might think but only really found its feet around 10 years ago with the works of Satoshi Nakamoto
. This anonymous identity
uncovered that where the long-standing financial institutions have failed to gain trust, the cryptocurrencies could well succeed. Their three unique characteristics of being decentralised in nature, a trustless entity and immutable has since thought to spark a surge in popularity for cryptocurrency.
HMRC’s Cryptoasset Legislation
The landscape of cryptocurrencies is a popular but incredibly fluid one, so keeping yourself clued-up and one step ahead of the game could be the difference between making or losing money on that latest investment. Whilst you might already be allocating a few minutes here and there to keep afloat of the cryptocurrency market, have you ever considered the tax implications of this digital currency? The HMRC have recently released a policy paper detailing the role of Income Tax and Capital Gains tax when it comes to cryptoassets, and below we have provided a brief overview to get you started.
Types Of Cryptocurrency
One of the first things to note is that the HMRC (as backed by the Cryptoassets Taskforce report
or CATF) makes clear that it does not consider cryptoassets (or cryptocurrency as is widely referred to) as money or a currency as such. Whilst there are huge range of ‘coins’ in the cryptocurrency market, they helpfully group all of these into three different categories to make it a little easier to determine which taxes might apply to you.
- Exchange tokens - these are primarily intended as a means of payment and is the category that the majority of large cryptocurrencies such as bitcoin tend to fall into, it’s value tends to be determined by use as a mean of investment or exchange. This is the main type of token to be discussed in the policy.
- Utility tokens - are normally issues by a group or business and will ordinarily provide the user with access to goods or services.
- Security tokens - are typically a means of providing the holder with any specific interests in a business.
Which Taxes Apply to Your Cryptoasset?
For the vast majority of us cryptoasset holders, our cryptocurrencies are being held as a personal investment which means it is fairly likely we will be expected to pay Capital Gains Tax when we decide to dispose of them. If however, we are one of the growing number of people who receive cryptoassets from an employer as a form of payment or as a result of another process such as mining, then we could well be expected to pay Income Tax and National Insurance contributions.
Income Tax And Cryptocurrencies
Determining whether or not you should be paying Income Tax
on your cryptoassets largely comes down to what it is you are doing, in that we mean whether or not you are conducting a trade. As with most trading activities, if you are making a profit from your trade then you should expect to pay Income Tax, of course when it comes to Cryptoassets the definition of ‘trade’ become a little more tricky to determine. There is a lot of background reading to be done in order to determine the extent to which trading of cryptoassets should result in taxing, but for a little more information please see the HMRC’s Business Manual
When it comes to cryptomining
there is a similar level of ambiguity surrounding whether or not it counts as ‘taxable trade’, and according to the HMRC this will depend on factors such as: organisation, commerciality, risk and of course degree of activity. If it’s thought that the cryptocurrency mining doesn’t quite make the cut as a ‘trade’ then it’s fairly likely that the pound sterling value (at the time) of any of the cryptoassets gained from mining will be taxed as miscellaneous income
’ is a name used in the crypto-world to describe a lucky individual receiving a certain allocation of cryptoassets, quite often as a result of taking part in some form of marketing activity. They are slightly unique in that they tend to have their own infrastructure and will under certain circumstances will also be subject to Income Tax in one form or another.
Capital Gains Tax And Cryptocurrencies
In very short terms, HMRC suggest that the buying and selling of any form of cryptoasset will most likely be considered an investment activity and therefore subject to Capital Gains Tax.
Although the very nature of digital cryptoassets means they are intangible, in the eyes of Capital Gains Tax they are considered a ‘chargeable asset’ if they are capable of being owned as well as having a value that can be realised. When and if you choose to ‘dispose’ of your cryptoassets there are a few things you’ll need to consider such as whether you’re selling cryptoassets to be used as money, in order to know whether you are subject to Capital Gains Tax.
There are of course a certain number of allowable costs that can be contributed to your calculation such as advertising or transaction fees, however it is worth noting that cryptomining will not count towards this deduction. This gets a little more complicated when it is thought that mining amounts to a trade for tax purposes, as they then become part of a trading stock but for a little more information on that please see HMRC’s Capital Gains Manual
. The HMRC also states that cryptocurrencies are subject to ‘pooling’ for tax purposes,whereby the amount originally paid for the tokens (pound sterling) is collated and forms the ‘pooled allowable cost’. There is also a detailed overview of Capital Gains Tax in the light of blockchain forks
whereby the community does something different to create a ‘fork in the blockchain’ which can sometimes result in new coins being created. For more information on each of these areas please see the HMRC’s cryptoasset policy paper
This article was intended as a brief introduction to the impact of Income Tax and Capital Gains tax on cryptoassets in light of the HMRC’s recently released policy paper which as stated “does not explicitly consider the tax treatment of cryptoassets held for the purposes of a business carried out by an individual”. There is a wealth of information you might want to discover when it comes to understanding the impact of tax on your cryptoassets, and for more information on areas not covered in this article including cryptoassets received as earnings
, record keeping
or any other considerations
please see the HMRC’s Cryptoassets For Individuals