Cryptoassets are a relatively new type of asset that have become more prevalent in recent years. New technology has led to cryptoassets being created in a wide range of forms and for various different uses.
Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:
- transferred
- stored
- traded electronically
While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.
HMRC do not consider cryptoassets to be currency or money. They have identified three types of cryptoassets:
- exchange tokens
- utility tokens
- security tokens
However the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.
In most cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. They will be liable to pay capital gains tax when they dispose of their cryptoassets.
Individuals will be liable to pay income tax and National Insurance Contributions (NICs) on cryptoassets which they receive from:
- an employer as a form of non-cash payment;
- mining, transaction confirmation or airdrops.
There may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits. This is likely to be unusual, but in such cases income tax would take priority over the capital gains tax rules.
Companies are subject to corporation tax on their profits and gains. Corporation tax also applies to companies that are members of a partnership or a limited liability partnership in respect of their share of the partnership profits and gains.
Capital gains tax treatment
HMRC generally treat the buying and selling of cryptoassets by an individual as an investment activity rather than a trade. This means that if an individual invests in cryptoassets they will typically have to pay capital gains tax on any gains they realise.
Cryptoassets count as a ‘chargeable asset’ for capital gains tax if they are:
- capable of being owned; and
- have a value that can be realised.
Individuals need to calculate their gain or loss when they dispose of their cryptoassets.
A ‘disposal’ is a broad concept and includes:
- selling cryptoassets for money
- exchanging cryptoassets for a different type of cryptoasset
- using cryptoassets to pay for goods or services
- giving away cryptoassets to another person
If cryptoassets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For CGT purposes the individual is treated as having received that amount of pound sterling even if they did not actually receive anything.
Allowable costs
Certain costs can be allowed as a deduction when calculating if there’s a gain or loss, which include:
- the consideration (in pound sterling) originally paid for the asset
- transaction fees paid before the transaction is added to a blockchain
- advertising for a purchaser or a vendor
- professional costs to draw up a contract for the acquisition or disposal of the cryptoassets
- costs of making a valuation or apportionment to be able to calculate gains or losses
The following do not constitute allowable costs for CGT purposes:
- any costs deducted against profits for income tax
- costs for mining activities (for example equipment and electricity)
Costs for mining activities do not count toward allowable costs because they’re not wholly and exclusively to acquire the cryptoassets, and so cannot satisfy the requirements of TCGA 1992, s 38(1)(a) (but it is possible to deduct some of these costs against profits for income tax or on a disposal of the mining equipment itself).
Pooling
Pooling allows for simpler CGT calculations.
Pooling applies to shares and securities of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”.
HMRC believe cryptoassets fall within this description, meaning they must be pooled.
Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a ‘pool’. The consideration (in pound sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’.
For example, if a person owns bitcoin, ether and litecoin they would have three pools and each one would have its own ‘pooled allowable cost’ associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.
If some of the tokens from a pool are sold, this is considered a ‘part-disposal’. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.
Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool.
Further information on cryptoassets tax for individuals can be found on the gov.uk website at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals.
Information on cryptoassets tax for businesses can be found on the gov.uk website at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-tax-for-businesses.