The United Kingdom tax authority, HM Revenue & Customs (HMRC), has issued revised guidance regarding the tax treatment of cryptocurrency.
Separate guidance has been published for individuals on the one hand, and businesses on the other.
The revised guidance represents more of an elaboration of the basic principles set out in prior guidance than any significant change in HMRC’s approach to the taxation of the receipt and disposal of cryptoassets.
The main take-away point—which is common to the guidance for both individuals and businesses—is that HMRC confirms its position that cryptoassets do not constitute money or currency. Consequently the acquisition and disposal of cryptoassets will generally fall within either the capital gains tax or the income tax regime. Which of these regimes applies depends on the context, in particular the circumstances of the acquisition or disposal. This is considered more fully than in the previous guidance.
Guidance for individuals
In most cases, HMRC expects that holders of cryptoassets would be regarded as carrying on an investment activity which means that, on disposal of the cryptoasset, any gain in value attributable to the period of ownership would fall within the scope of the capital gains tax, rather than the income tax, regime. This is on the basis that HMRC assumes most individual holders of cryptoassets will not be engaged in a “trade” so far as his or her dealings in cryptoassets are concerned.
Carrying on a trade of dealing in cryptoassets is expected to be the exception rather than the rule, because trading requires a high frequency of purchase and sale, along with a high degree of organisation and sophistication. In the normal course, therefore, HMRC anticipates that individuals will be engaged in an investment activity.
It’s worth noting here that the rates of capital gains tax in the UK are generally lower than those for income tax, so capital gains tax treatment is usually preferable for individuals.
Certain specific types of transactions will however give rise to an income tax charge—even where the individual is not carrying on a trade in cryptoassets—such as when an individual receives cryptoassets from his or her employer, or when the individual receives cryptoassets from mining and, in some cases, airdrops. For example, in the case of mining, the sterling value (at the time of receipt) of any cryptoassets awarded for successful mining will be taxable as income.
Airdrops will not be subject to income tax on their receipt where they are allocated to an individual without the individual’s having provided a service in return. Conversely, where airdrops are allocated in return for services, then their receipt will fall within the scope of income tax. The subsequent disposal of the cryptoasset, if it has increased in value, would normally be within the scope of capital gains tax.
Guidance for businesses
So far as the section of the guidance directed at businesses is concerned, a significant proportion of this mirrors that for individuals. It adds however some fairly detailed guidance specific to the business context, for example regarding an employer’s obligations so far as the deduction of income tax and social security contributions at source are concerned, where employees are remunerated in cryptoassets.
As in the case of individuals, the starting position is that typically HMRC would expect the disposal of a cryptoasset to be the disposal of an asset and any resulting gain to be subject to corporation tax on capital gains (the corporate equivalent of the capital gains tax charge referred to above in the context of individuals).
One of the key features of the section of the guidance for businesses, however, is its consideration of the factors determining whether the purchase and sale of cryptoassets amount to a separate “trade” for tax purposes. By way of illustration, in a mining context the example is given of the use of a single home computer using spare capacity to mine tokens—which would not normally constitute a separate “trade” for tax purposes—as opposed to the scenario where a bank of dedicated computers is purchased for that purpose, which would likely amount to a separate trade. In such a case the value of the cryptoassets at the time they are awarded would be taken into account in the calculation of trading profits; if those cryptoassets are retained, grow in value and are subsequently disposed of, such gain would be subject to tax on capital gains.
HMRC points out that the industry continues to develop at a fast pace, with the types of assets and transactions likely to vary going forward, so the tax treatment of cryptoassets may develop further in time; but the present guidance can be seen as a helpful contribution, with no major surprises.