Crypto, How is it taxed?

Although cryptocurrency shares many similarities with other currencies, it is not considered to be currency or money by the Bank of England, G20 Finance Ministers, and Central Bank Governors, or HMRC.

Individuals
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 does not currently recognise BTC etc as a currency, however, crypto assets are intangible assets and appear to fall into section 21(1)(a) of Capital Gains Tax.

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 crypto-assets in existence HMRC does not accept that buying and selling the most popular versions of these assets is a gambling activity.
  • HMRC says 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 is 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.

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.

Capital Gains – what expenditure is allowable? 

HMRC’s view is that allowable expenditure would include 

  • The amount (in pound sterling) originally paid for the asset
  • Transaction fees paid for having the transaction included on the distributed ledger.
  • Advertising for a purchaser or a vendor.
  • Professional fees to draw up a contract for the acquisition or disposal of the tokens.
  • Costs of obtaining a valuation or apportionment to be able to calculate gains or losses.
  • Some exchange fees such as fees to swap from pounds sterling into another fiat currency and vice versa, and fees to purchase tokens from fiat currency and transfer tokens back into fiat currency. Fees for withdrawing and depositing fiat currency on the exchange are not deductible.

If you would like any worked examples or more information on the reliefs applicable to cryptocurrencies/capital gains, please get in touch. 

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