HMRC has recently published guidance for UK resident individuals on the potential liability to UK taxes that may arise on receipt or disposal of cryptoassets. The guidance is mainly concerned with cryptoassets held as investments. It is expected that Her Majesty's Revenue and Customs (HM Revenue and Customs or HMRC) is a non-ministerial department of the UK Government responsible for the collection of taxes, the payment of some forms of state support and the administration of other regulatory regimes including the national minimum wage.... will publish separate guidance for those trading cryptoassets and for companies but traders can expect to be chargeable to income tax or corporation tax (if a UK taxable company) on profits. Other taxes may apply if an individual receives cryptoassets as remuneration for employment or other services.
The guidance sets out that HMRC does not consider the buying and selling of cryptoassets to be the same as gambling, the importance of this being that gambling winnings are exempt from UK taxation, with losses not being relievable. The guidance also sets out that HMRC does not consider cryptoassets to be money or a currency, confirming their previously stated position.
The guidance states that in their opinion the vast majority of individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases and that therefore, they will be liable to pay Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... when they dispose of their cryptoassets. Usual Capital Gains Tax ("CGT") applies in certain cases when an asset is sold for more than it was originally purchased. The taxable gain (profit) may be triggered following the transfer of an asset, although commonly this would follow a sale. A number of tax reliefs are available to exempt or reduce the tax that may apply. Basic tax planning may... rules apply, meaning that disposals and acquisitions must be converted to Sterling values and the usual costs of acquisition and disposal will be allowable against any gain.
In HMRC’s opinion, cryptoassets within the scope of CGT fall within the requirements of section 104 of the Taxation of Capital Gains Act 1992 meaning that, like shares and securities, each type of cryptoasset owned must be pooled for the purposes of calculating the base cost of the asset for disposal and accordingly, the gain realised.
Furthermore, as a CGT asset, the holder may make a negligible value claim if their asset becomes of negligible value. However, if a section 104 pool exists, this requires that the whole pool has become of negligible value, not simply an individual token.
Finally, HMRC note the relatively high risk of cryptoasset holders being defrauded. In HMRC’s opinion, a victim of theft or fraud does not make a disposal of the asset as they have a right to recover the asset. As such, no loss can be claimed for CGT purposes. Furthermore, if a person pays for a cryptoasset which they do not receive, no CGT loss is available.
The taxation of cryptoassets is complex and is developing. If you would like advice on the tax implications to you of these assets, please contact us.