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