The United Kingdom (UK) tax authority, Her Majesty’s Revenue & Customs (HMRC), has taken the first steps toward recovering tax that it believes may be outstanding from UK resident cryptocurrency investors: it has been reported that several crypto exchanges have received demands from HMRC relating to customer details and their transactional activity.
This comes in the wake of a similar approach to exchanges and US taxpayers on the part of the IRS.
HMRC has very broad information-gathering powers which entitle it to obtain details of taxpayers in circumstances such as these.
What are the UK tax liabilities of investors in cryptocurrency?
HMRC’s view—as expressed in an announcement dated December 2018—is that for most customers of crypto exchanges their dealings in cryptocurrency will amount to an investment activity in a capital asset. What this means is that UK tax resident cryptocurrency investors will generally be within the scope of UK capital gains tax in respect of the growth in value of their cryptocurrency during their period of ownership of the currency, and will need to calculate any gain (or, conversely, any loss) arising on its disposal.
If the value of the relevant holding has increased between the date of acquisition and the date of disposal, an individual will therefore be potentially liable to capital gains tax in respect of such increase (subject to any available deductions, such as the annual personal allowance for capital gains and any capital losses which may be available to the individual).
On any disposal, therefore, individuals need to calculate their gain or loss in order to determine whether they need to pay capital gains tax.
The concept of “disposal” has a broad meaning in a UK tax context and includes:
- The sale of cryptoassets for cash consideration;
- Exchanging cryptoassets for a different type of cryptoasset;
- Using cryptoassets to pay for goods or services; and
- Gifting cryptoassets to another person.
So UK tax rules will require individuals to calculate their potential liability to tax whenever they engage in any of the above transactions.
And this latest development indicates that HMRC can be expected to use the wide information-gathering powers at their disposal to ensure that any UK tax liabilities arising from transactions in cryptocurrency are fully reported and paid.