Crypto Tax for Individuals

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Who we are

For a number of years, Hodge Bakshi Chartered Accountants & Chartered Tax Advisers have been significantly involved in helping clients across a wide array of Cryptocurrency tax-related issues. This ranged from basic compliance to some highly complex Crypto tax issues and helping other professional advisers!

There has been a surge in Cryptocurrency investment in the last couple of years which has not gone un-noticed by HMRC in particular.

HMRC have started to actively enquire and are working with many well-known Crypto platforms and exchanges to ascertain who may have tax to pay on their Cryptoassets.

With our Crypto team being personally involved since Bitcoin’s inception we are uniquely placed to help you.

We are also proud members of CryptoUK which is the UK’s largest self-regulatory association representing the Cryptoasset sector.

Summary:

HMRC has confirmed in its Cryptoassets manual that:

• Most individual investors in Cryptoassets and Cryptocurrencies will be subject to Capital Gains Tax (CGT) on gains and losses.
• Section 104 pooling applies for individuals, subject to the 30-day rule for 'bed and breakfasting'. Different pooling rules apply for businesses.
• It will be rare to regard investing in Cryptoassets as trading, although 'mining' may indicate a trading activity.
• Other tax treatments rather than trading or investment may need to be considered by companies such as loan relationships and the intangibles rules.
• A capital loss may be claimed in the event that a Cryptoasset becomes of negligible value. Evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
• Exchange tokens such as Bitcoin are located for tax purposes where ever the beneficial owner is resident.  
• VAT may need to be considered.
• HMRC does not consider Cryptoassets to be currency or money.

How are individuals taxed

This section of the guide is for individuals. Please click here for our guide on companies.

Under conventional tax rules, whether your profits are taxed as income or your gains are taxed as capital, depends on whether you are trading (income) or investing (capital).

HMRC do not currently recognise BTC etc as a currency, however, Cryptoassets are intangible assets and appear to fall into section 21(1)(a) of TCGA 1992.

This means that disposal proceeds are taxed as capital gains unless there is evidence of trading.

Trading or investment?

• If you are actively mining BTC, or you are a dealer making multiple trades through buying and selling different investment assets or mixing currencies, you may well be treated as a trading operation.
• If you are buying and holding your investment and then selling according to the market conditions, you are investing and your gains or losses will be taxed as capital.
• Although there are thousands of different types of Cryptoassets in existence HMRC do not accept that buying and selling the most popular versions of these assets is a gambling activity.
• HMRC say in their manual that they would only expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication as to amount to a financial trade in itself in exceptional circumstances.

The key test to determine whether you are trading for tax purposes is to apply what are known as the Badges of Trade. These look at what you do in your day job, the frequency of trades and your objectives in owning the Cryptocurrency. Guidance can also be taken from case law dealing with trading in shares and securities. Each case needs to be considered on its own facts, especially given the multifunctionality of some Cryptocurrencies.

• If your profits are taxed as income, they are taxed at the same rate as a salary or profit from trading.
• There are no special allowances or rates that apply to such profits.
• If you make a trading loss, you should be able to offset this as sideways loss relief against your other income.
• If you are trading you are expected to prepare trading accounts for tax and register as a sole trader for Income Tax.
• Profits may also be taxed as miscellaneous income though this is even less likely.

Capital Gains Tax

If your gains on disposal are taxed as capital, you should obtain tax relief on the direct costs of buying and selling the Cryptocurrency investment. You may offset your annual Capital Gains Tax (CGT) exemption if it is unused elsewhere.

• 'Disposal' here can include:
• selling tokens for money.
• exchanging tokens for a different type of token.
• using tokens to pay for goods or services.
• giving away tokens to another person unless it is a gift to your spouse or civil partner.
• Moving tokens between wallets is not a disposal for tax purposes.
• Losing your private key is also not a disposal:
• It may be possible to make a Negligible value claim where you have lost your private key if it can be shown that there is no prospect of recovering it or of accessing the tokens in some other way. The same may apply for tokens that have become worthless. This would be for the entire relevant pool (see below) and not just individual tokens.
• If you make capital losses these are offset against other gains made in the year or carried forward. If Cryptoassets are disposed of to a connected person and you make a capital loss, it is a restricted or clogged loss under s18 TCGA 1992 and can only be offset against other gains on disposals to the same connected person whilst you are still connected.
• Cryptoassets are what are termed as fungible assets, therefore you can pool like with like. Gains in BTC can be offset with losses on BTC etc. The exception, NFT’s (Non-Fungible Tokens) these are separately identifiable, and therefore cannot be pooled.
• Where the assets are equity-linked, reliefs should be considered and where debt-linked, exemptions considered. Note that the position is not at all clear and advice should be sought.
• HMRC confirms that Cryptoassets may be pooled under section 104 TCGA 1992 subject to the 30-day bed and breakfast rule.

Asset pools

Cryptoassets are all able to be pooled, as they are fungible items. Each Crypto will have their own pool, with their own allowable cost. With each acquisition or disposal of coins from each pool, the pooling cost changes.

Same Day rule TCGA1992/S105

All Cryptoassets of the same type acquired by the same person on the same day and in the same capacity are treated as though they were acquired by a single transaction.

All Cryptoassets of the type disposed of by the same person on the same day and in the same capacity are also treated as though they were disposed of by a single transaction.

If there is an acquisition and a disposal on the same day the disposal is identified first against the acquisition on the same day.

If the number of Cryptoassets disposed of exceeds the number acquired on the same day the excess Crypto will be identified in the normal way.

“Bed and Breakfast” rule TCGA1992/S106A

Disposals must be identified with acquisitions of Cryptoassets

• of the same class.
• acquired by the same person in the same capacity, and
• acquired within the 30 days after the disposal.

This rule has priority over all other identification rules except the `same day’ rule.

The three requirements above (same class, same capacity, later acquisition within 30 days) must be met for the rule to operate.

The use of asset pools can, very quickly, get very complex, especially with a large number of transactions and, or the exchanging of tokens. It is critical advice is sought at an early stage.

Staking

Staking, can incur a double taxation charge.

In some cases, staking rewards will initially be taxed as income, at the fiat value. When the rewards are received, any appropriate expenses can be deducted from this before tax is charged.

However, if you decide to keep the rewards, and later dispose of the tokens, then you may also incur a Capital Gains Tax charge on the disposal of your Crypto.

Mining

Mining Crypto, similar to staking may incur a double taxation charge.

Mining activity may have to be reported as miscellaneous income or trading income if it meets certain criteria. This is subject to Income Tax. A capital gains charge may apply on subsequent disposal.

There are some cases, where an individuals’ mining activity may be deemed a taxable trade, at which point, the rules & tax treatment can get quite complex.

Please seek advice in the first instance as this is a highly complex area.

In many scenarios, the activity may not amount to a trade, and will therefore be taxed as Income Tax when the mining rewards are received.

Furthermore, if the rewards are kept and then disposed of at a later date, this may also incur a Capital Gains Tax charge.

It is key to note, that HMRC in general, do not allow equipment costs (Expensive GPU’s) to be a deductible expense where mining is concerned, there are exceptions to this however.

Airdrops

Airdrops can be received just simply for holding a token, in these scenarios’ Income Tax may not apply. However, if you are the recipient of an airdrop, for doing something in return, then Income Tax may apply to that airdrop.

In both scenarios, a subsequent disposal of tokens received through an airdrop may result in a chargeable gain for Capital Gains Tax.

Soft / Hardforks

Softforks do not create a new Cryptoasset, they just update the protocols of the Crypto, therefore there is no tax treatment required.

HMRC can deem a hardfork event, to be the introduction of a new Cryptoasset. In cases where a new Cryptoasset is formed, individuals must split the cost of the new asset pool on a just and reasonable basis.

Peer to Peer Lending

Decentralised finance (DeFi) is becoming more and more common, with multiple platforms offering returns on your Crypto. However, the tax treatments can be inherently different, from platform to platform.

Liquidity Pooling

This often includes exchanging multiple tokens, to form a Liquidity Providing token. This is a very complex area for tax, and should be treated with caution.

‘Dividends’ for holding specific tokens

There are some tokens, where you receive a cut of the transaction fees incurred by other users, your slice of this fee, all depends on your holding % of the current circulating supply. This can get complex, due to the pay-outs being perpetual, constant.

DeFi

Whilst DeFi staking can be seen as simply ‘staking’ it is not always the case and a strong understanding of the mechanics is required in order to properly satisfy reporting requirements.

DeFi lending however, is an incredibly complex area, and one that is still being challenged over 18 months since the Decentralised Finance manual was republished via HMRC. 

With the increase of DeFi, there has also been an increase in the number of queries regarding Crypto loans, where users borrow money using their Cryptoassets as collateral. It is key to understand, that in most cases the interest you are charged on the loan is NOT deemed a deductible cost on any Capital Gains Tax charge.

In some cases, taking out a Crypto loan may trigger a chargeable event.

If you are involved with lending, on either side, we strongly recommend that you get in touch.

NFTs

NFTs (Non-Fungible Tokens) are not a relatively new type of Crypto, and there are many examples of NFTs prior to the NFT mainstream adoption in 2021.

These tokens can form a number of tax complications, the standard rules apply when you purchase an NFT with a Crypto, where the Crypto you paid is deemed a disposal and potentially incurs CGT.

However, NFTs go further and can include many benefits, such as memberships or rights to future NFTs.

If you are involved with NFTs we would advise to proceed with caution as the tax implications can be severe.

Fraud

HMRC does not consider theft to be a disposal, as the individual still owns the stolen asset and has a right to recover it. This means victims of theft cannot claim a loss for Capital Gains Tax.

Individuals who contract to acquire tokens but then do not receive the tokens they have paid for may not be able to claim a capital loss.

Individuals who contract to acquire tokens and do actually receive tokens, may be able to make a negligible value claim to HMRC if those tokens become worthless. If the tokens are worthless when acquired then a negligible value claim won’t be allowed. This won’t affect the ability of the individual to dispose of the tokens by other means to crystallise the capital loss.

The terms cryptoassets / Cryptocurrency / Crypto Currency / Crypto are all interchangeable.

Information correct as of 16 November 2023