The tax treatment of cryptocurrency

The tax treatment of cryptocurrency

Understanding HMRC’s new guidelines

Tom Elliott, Partner, Head of Private Clients
22/07/2019
The tax treatment of cryptocurrency

The recent falls in the value of Bitcoin, whilst not reaching the extremes of the first quarter of 2018 which saw the price fall over 60%, is a timely reminder of the volatility of this new asset class, now widely available to the most inexperienced of retail investors. As seen by this week’s US Senate hearing on Facebook’s proposed new cryptocurrency, governments and regulators are attempting to ensure that the relevant legislators can maintain appropriate oversight in this arena.

Part of the challenge is how profits and losses realised on any trading in cryptocurrency assets should be subject to taxation. There are now more than 2,500 cryptocurrencies listed on various exchanges and after a few years of uncertainty around the taxation of cryptoassets HMRC has recently published its view on the taxation of cryptoassets for individuals.

HMRC stated that the tax treatment of cryptoassets continues to develop and that it will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place. Some important questions still remain unanswered, such as where cryptoassets are situated for tax purposes and the taxation of cryptoassets for corporations which will hopefully follow soon. On the other hand, the guidance provides a welcome clarification of fundamentals such as capital gains and income tax treatment for individuals.

What is HMRC’s view on cryptocurrency?

Despite being a digital and intangible asset, if cryptocurrency is capable of being owned and has a value that can be realised, HMRC considers it to be a chargeable asset. In most cases the tax treatment for investors will be straight forward. 

Although investments in cryptocurrencies are highly speculative in nature, HMRC does not consider buying and selling of cryptoassets to be the same as gambling. 

HMRC has also confirmed that they do not consider cryptocoins to be currency and therefore no tax relievable pension contributions can be made using cryptocurrency.

Cryptoassets are considered to be property for the purposes of Inheritance Tax and therefore will form part of individual’s estate.

Gains on disposal of cryptoassets

Individuals will be liable to pay Capital Gains Tax (CGT) on any gains when cryptoassets are:
  • sold for cash
  • exchanged for a different type of cryptoasset
  • used to pay for goods or services
  • given away to another person (other than a spouse). 
HMRC believes cryptoassets fall within the same classification as shares and securities, meaning that instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a ‘pool’. This also means that special rules in respect of same day and 30 days disposals will apply which makes the calculation rather complicated. 

A point to note is that when generating a CGT report, it is important to ensure that a report compatible with UK tax rules is used, as the value of losses or gains will vary considerably – particularly taking into account the volatility of the cryptoassets over the past couple of years.

Losses on disposals and worthless coins

If an individual disposes of cryptoassets for less than their costs, then the loss will reduce any capital gains in the same year and any remaining loss will be carried to future years and set against first available gains after annual exemption for that year.

If the cryptocurrency becomes worthless, then, provided the individual still owns it, the loss can be crystalised. In this case a ‘negligible value’ claim will need to be made to HMRC, which is usually done at the same time as reporting the loss.

As cryptoassets are pooled, the negligible value claim will need to be made in respect of the whole pool, not individual tokens.

Lost and stolen keys

There are security concerns about storing the cryptocurrency. Major exchanges have been hacked, bitcoins worth millions have been stolen and there are thousands of stories of personal bitcoin thefts, due to insecure handling of private keys, or forgotten keys.
 
HMRC has confirmed that neither theft nor misplacing of keys constitutes a disposal for CGT purposes, as the private keys still exist as part of the cryptography and the individual has a right to recover them.
 
If it can be proven that there is no realistic possibility for recovering keys or cryptoassets, then a negligible value claim can be made and, dependent on HMRC accepting the claim, losses can be crystallised. If the key is subsequently recovered by the owner and the cryptoassets disposed then the base cost will be the negligible value (likely to be zero) and the capital gain will equate to the total amount received. 

Income tax treatment

Where the trades are conducted with a very high frequency and sophisticated level of organisation, HMRC may consider that the individual concerned is running a financial trade in cryptoassets. In this case the profits will be taxable via Income Tax and National Insurance contributions as opposed to CGT. The business tax treatment is unlikely to be applicable to the general investor and will only be used by HMRC in exceptional circumstances.
 
To determine whether a trade is being conducted, the same logic applies as for shares, securities and other financial products and guidance can be drawn from the existing case law on trading in shares and securities.
 
Where cryptoassets are received in return for services performed from employment, this income will also be subject to Income Tax and National Insurance contributions on the value of the asset received. The same applies to income received from coin mining, airdrops and transaction confirmations.
 
Subsequent disposal of cryptoassets may result in a chargeable gain or loss for CGT purposes.

Further information

If you would like to discuss the tax treatment of cryptocurrencies further please contact our Private Clients’ team or your usual Crowe contact.

Contact us

Tom Elliott
Tom Elliott
Partner, Head of London Private Clients
London