By David Cairns
Hawsons
HMRC have released guidance on the taxation of crypto assets for individuals. It is believed to be one of the most comprehensive sets of guidance currently issued by any government and it can found at www.gov.uk/government/ publications/tax-on-cryptoassets
How is an individual taxed?
Crypto mining is subject to Income Tax as miscellaneous income on discovery (not necessarily on sale) at tax rates up to 45 per cent. Future growth is normally subject to Capital Gains Tax.
Investments are subject to Capital Gains Tax. Losses can be used against other gains.
Trading – it would not be surprising that HMRC may argue that an individual is trading and subject to Income Tax if there were many transactions and there was a profit. An individual might argue for trading if there were losses (to offset against income and gains), but HMRC may argue against. The tax treatment follows all the usual badges of trade rules.
What are the identification rules for Capital Gains Tax?
They are similar to a disposal of shares with special rules including:
* Same-day transactions
* 30 day rule
* The section 104 pool
How is a company taxed?
This depends on how it is treating the crypto assets in its accounts. Following IFRS interpretations Committee guidance, IAS 2 (inventories) could apply (when held for sale in the ordinary course of business) or IAS 38 (intangible assets) could apply when held as an investment. The corporate taxation should, therefore, follow as trading income or capital gains with rates which are currently 19 per cent. However, any formal guidance/law has yet to be issued.
How is an employee taxed on receipt?
If crypto assets are given by reason of employment, they are readily convertible assets in money’s worth. In essence they are subject to PAYE (Income Tax and NI – employment taxes) on receipt.
Are crypto assets subject to VAT?
They are recognised as akin to a financial product and currently not within the scope of VAT.
Are there any tax ‘red herrings’ or incorrect stories?
The following are in circulation, but not accepted by HMRC:
* It is gambling so it is not taxable
* It is a gain on money for personal use and is not taxable under CGT.
* Exchanging one cryptocurrency for another (or a different type) does not give rise to a taxable event.
Is HMRC on the offensive and seeking out non disclosure of income and gains?
Absolutely! HMRC has sent letters to at least three popular cryptocurrency exchanges operating in the UK, requesting client transaction data. These advance notices, which have been mailed to eToro, Coinbase and CEX.IO, will serve as precursors to a later statutory letter which will require more definitive action.
What is the situs of a crypto asset for resident but non-UK domiciled individuals?
With UK resident but non-UK domiciled individuals being subject to Inheritance Tax on UK situs assets or potentially capital gains on the remittance basis. This is still open to interpretation or regulation.
If the crypto currency is treated as UK situs, then the downside for non UK resident and non UK domiciled individuals is that it could be subject to UK inheritance tax on death. These individuals may want to consider company/trust structures to own UK assets.
Is crypto asset use regulated or unregulated?
The UK is fully supportive of crypto assets and has appointed a crypto assets taskforce to understand and develop the market. Their last report is dated October 2018 and can be found at www.gov.uk/government/publications/cryptoassets-taskforce
Crypto assets remain largely unregulated, but this may change from early 2020.
Other countries for example India and China do not support crypto assets and have made their use illegal.
If you would like to know more about the tax implications of crypto assets, contact David Cairns on 01604 645600 or by email