This section of the guide is for businesses, including companies, sole traders and partners. Please click here for our guide on individuals.
In November 2019, HMRC released new guidance dealing specifically with the tax treatment of exchange tokens, for example BTC, for businesses and this is now incorporated within the new Cryptoassets manual. The tax treatment of security tokens and utility tokens will be addressed in future HMRC guidance.
The current guidance also addresses how to deal with blockchain forks and airdrops which are outside the scope of this guide.
A business is liable to pay tax on activities they carry out which involve exchange tokens, such as:
- Buying and selling exchange tokens.
- Exchanging tokens for other assets including other types of cryptoassets.
- Providing goods or services in return for exchange tokens.
HMRC have identified several ways in which exchange tokens might be subject to Corporation Tax including:
- Trading income.
- Loan relationships.
- As intangibles.
- As investments i.e. chargeable gains.
The calculation of businesses' taxable profits for the purposes of filling in a tax return is undertaken in pounds sterling, but tokens can be traded on exchanges that may not use pounds sterling (GBP). HMRC say if the transaction does not have a GBP value an appropriate exchange rate must be established in order to convert the transaction to sterling and taxpayers must keep records of the valuation methodology.
Taxed as trading income
As with the tax analysis of other types of business the question of whether a trade is being carried on is key in determining the correct tax treatment.
The Badges of Trade apply to determine whether the buying and selling of exchange tokens amounts to a trade. Particularly relevant factors include:
- Degree and frequency of activity.
- Level of organisation.
- Intention including risk and commerciality.
If a person or business’s activities amount to a trade, the receipts and expenses will form part of the calculation of the trading profit.
- If the trade is carried on through a partnership, the partners will be taxed on their share of the trading profit of the partnership.
Taxed under the loan relationships rules
A company has a ‘loan relationship’ if it has a money debt that has arisen from a transaction for the lending of money e.g. where it has lent or borrowed money. HMRC do not consider exchange tokens to be money or currency, meaning that the loan relationship rules do not apply other than where exchange tokens have been provided as collateral for an ordinary loan. Even where it is the exchange tokens themselves which are being loaned, it is unlikely that this would constitute a loan relationship.
Taxed as intangible assets
Companies which account for exchange tokens as intangible assets may be taxed under the Corporation Tax (CT) rules for intangible fixed assets if the token is both:
- An ‘intangible asset’ for accounting purposes.
- An ‘intangible fixed asset’: that has been created or acquired by a company for use on a continuing basis. Exchange tokens which are simply held by the company, even when held in the course of its activities, will not meet this definition.
Taxed as investments (chargeable gains)
- All exchange tokens are digital and therefore intangible but they count as a ‘chargeable asset’ for CGT and CT on if they are both:
- Capable of being owned.
- Have a value that can be realised.
- If a company holds exchange tokens as an investment, they are liable to pay CT on any gains they realise when they dispose of them. If none of the above treatments apply e.g. trading, loan relationships etc. it is likely that the chargeable gains rules will.
- If a sole trader holds exchange tokens as an investment, they are liable to pay CGT on any gains they realise (see above).
- If a partnership or an LLP holds exchange tokens as an investment, individual partners or members are liable to pay CGT on any gains they realise. Corporate members will pay CT on chargeable gains.
As for individuals a ‘disposal’ for these purposes includes:
- Selling exchange tokens for money,
- Exchanging exchange tokens for a different type of cryptoasset.
- Using exchange tokens to pay for goods or services.
- Giving away exchange tokens to another person.
See 'How to tax profits or gains made on cryptocurrency: Individuals' above for transactions which are not classed as disposals here.
If a company realises a capital loss on the disposal of exchange tokens, this can be used to reduce an overall gain on total capital disposals. Special rules apply if the loss making disposal is to a connected person.
As for individuals (see above) a company may be able to make a negligible value claim if cryptoassets become worthless or it is no longer possible to access them because the private key has been lost.
If a company gives away exchange tokens to another company which is not a member of the same group, or to an individual or other entity, it is treated as a disposal at market value with chargeable gains being calculated accordingly.
If a company gives exchange tokens to charity, they will not have to pay CT on any gain unless either:
- They make a ‘tainted donation’; meaing they have entered into arrangements to obtain a financial advantage or
- They dispose of the tokens to the charity for more than they paid for them.
Information correct as at 30 April 2021.
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