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' is likely to 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.
Section 21 TCGA 1992 assets and disposals
(1) All forms of property shall be assets for the purposes of this Act, whether situated in the United Kingdom or not, including;
(a) options, debts and incorporeal property generally, and
(b) currency, with the exception (subject to express provisions to the contrary) of sterling,
(c) any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired.
(2) For the purposes of this Act:
(a) references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset, and
(b) there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of.
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.
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.
- 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.
Information correct as at 30 April 2021.
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