Tax on Cryptocurrency
Do you need to pay UK tax on your cryptocurrency activity?
Risk is inherent in crytpocurrency activity, but one area where uncertainty should be mitigated is the tax treatment of your crypto transactions.
The challenge for individuals and companies engaged in cryptocurrency activity is making sense of this emerging area of taxation.
The UK position of tax on cryptocurrency is governed by a set of nascent tax rules, supported by a developing body of case law and other related pieces of legislation that pre-date the existence of cryptocurrencies.
HMRC’s focus remains – for the time being at least – the use of digital currency for criminal purposes, such as the laundering of illicit funds, and not the development of a specific tax on cryptocurrency framework.
As cryptocurrency enters the mainstream and becomes an industry in its own right, this current position may in time alter, with the income generation potential for the Government too attractive to ignore.
But for individuals and companies active in cryptocurrency today, the duty remains to take a responsible and compliant approach to tax.
Under prevailing HMRC guidance, published in 2014, it is the activity in question that will determine the tax treatment, and not the underlying asset or type of cryptocurrency.
As a general position, this provides a degree of clarity on which to proceed with effective tax planning, as with any other form of financial activity.
Specialist tax advice in this area will help to ensure you are meeting your liabilities to UK tax on cryptocurrency and your disclosure obligations, while maximising opportunities for tax-efficient structuring and planning of your activity.
Here to help
ETC is at the frontline of this fast-developing area. We are advising individuals and companies holding and transacting in cryptocurrencies, including Bitcoin, Litecoin, Ethereum, ZCash, Dash, Ripple, among many others.
We also accept payment in crypto, subject to prior agreement.
Whether you are looking to set up a cryptocurrency fund or are already actively engaging in cryptocurrency activity – buying, selling, holding, mining – we will assess whether your activity falls under the classification for personal, speculative, trade, or investment.
Looking at your specific circumstances, we will analyse the tax treatment of your activities, assessing where chargeable gains or allowable losses arise on your cryptocurrency transactions, and where exemptions may apply, for example, to transactions considered as ‘highly speculative’.
As specialist UK chartered tax advisers, we offer planning advice to ensure your profits are structured and taxed as efficiently as possible, taking your wider circumstances into consideration, including your residence status, domicile, occupation and history of cryptocurrency activity.
We also provide advice on tax return disclosures, particularly in respect of tax-free positions where supportive rationale to HMRC may be advisable.
For advice on the taxation treatment of your transactions and dealings in cryptocurrency, contact us.
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Under HMRC guidance, the activity in question determines the cryptocurrency tax treatment and whether liability to Capital Gains, Income tax or Corporation tax has been triggered.
This is consistent with the position on land, property and dealing in shares and other financial instruments, and means the underlying assets are not of primary significance.
Taking into account HMRC’s guidance and the applicable legislation, cryptocurrencies could be held, and should be distinguished for tax purposes, for the following reasons:
- Speculatively – tax-free gains.
- For personal use and expenditure – tax-free gains.
- As an investment – subject to capital gains regime. The amount subject to CGT for an individual (10/20%) and corporation tax (19%) for a company.
- As a trading asset – as such the profits are subject to income tax for an individual (20/45/45%).
Read our detailed summary of this area of tax law.
Are the cryptocurrency activities speculative?
HMRC’s view in the 2014 guidance is that cryptocurrency activity can be so speculative such that it renders it non-taxable. This can be applied as the basis of a filing position, where the specific facts and circumstances support this position.
However – HMRC retains the prerogative and discretion to challenge this. As such, to avoid any penalties being imposed it is important to make the appropriate disclosure on the relevant tax return.
Are the activities of an investment nature?
In many ways, the investment status is a default, applicable where there is no justifiable filing position on a ‘speculative’ or ‘personal use’ basis, but the activities are not so organised that one will fall to be classed as a venture in the nature of trade.
Within this status, the gains and losses would fall within the capital gains tax regime. As such, any gains will be subject to CGT at either 10% or 20% depending on the level of other income earned by the taxpayer in the year.
They should generally get the Annual Exemption which is £11,300 for 2017/18.
By extension, if gains on your activity are taxable then the corollary is that the losses should be allowable.
Generally speaking, for an individual, a capital loss can be offset against a current year capital gain or carried forward indefinitely.
A question is whether the activities could be an investment business? In other words, something that is more than an investment but less than a trade. In such circumstances, certain business reliefs might be available.
Tax treatment when trading
There have been no specific cases on whether cryptocurrency activity constitutes a trade. The most analogous body of case law relates to whether dealing in shares is an investment or a trading activity.
If the activities are such that it would constitute a trade then any profits that arise to an unincorporated business (i.e. sole trader or partnership / LLP) would be subject to income tax. Where activities were run through a company then profits would be subject to corporation tax.
In such instances, it becomes possible to offset revenue expenses – energy, rent on premises and staff costs – and also claim capital allowances on capital items such as computer equipment and other plant and machinery.
Tax-free as a hobby?
Crypto activity that is classed a ‘hobby’ is non-taxable. Otherwise, as a trade, it becomes subject to income tax for individuals or corporation tax if operated through a company, at the prevailing rate for the circumstances.
Case law does exist on when a hobby might become a trade, usually arising in the same context as the ‘trading or not’ category, as a result of a taxpayer trying to claim a trading loss and HMRC resisting those claims.
Take advice on your specific activity and wider circumstances to understand whether your activity would be classed as a hobby or trade, and taxed accordingly.
Is crypto a currency or an asset?
As a matter of current law, it seems that cryptocurrency is not a currency. However, HMRC’s published guidance specifies that any such gains or losses will be treated as a gain or loss on foreign exchange.
This may not extend to smaller cryptocurrencies and any assets that are received on an Initial Coin Offering (“ICO”). Seek advice on your specific circumstances to ensure you work to the correct classification.
To illustrate, beyond the conversion of cryptocurrency in to fiat currency – such as Bitcoin in to GBP – also relevant will be any gain or loss on the conversion of one type of cryptocurrency in to another one, such as Bitcoin into Ethereum, and potentially the investment of currency in to other assets or services on an ICO.
The implications of this are significant, for example on the availability of the Capital Gains Tax exemption on foreign currency for personal use.
This is a point requiring particular caution, since HMRC may have a different interpretation in what remains an undeveloped area of tax law. We would advise that any filing position that relies on such an interpretation should disclose this reasoning as its basis.
Cryptocurrency tax liability for service providers
For service providers engaged in the cryptocurrency industry, including professional advisers, there may also be a valid question of tax treatment on their service provision relating to crypto activity. For example, taking payment in cryptocurrency, as we do here at ETC.
Largely, these will be treated as any other business under current tax rule, but taking advice will ensure you are taking a tax-efficient approach.
How does domicile and residence impact tax on cryptocurrency?
No capital gains tax is payable on the disposal of assets where the individual or entity is non-UK resident, excluding UK residential property and, in the future, UK commercial property.
This is subject to anti-avoidance rules, including the temporary non-residence rule. It is advisable to take professional opinion on your circumstances.
A cryptocurrency is likely to be a non-UK asset. As such, a UK resident but non-UK domiciled individual who is a remittance basis user will only pay tax on disposals where the proceeds are brought to, or enjoyed in, the UK.
In addition, for those who meet the relevant conditions then their cryptocurrency holdings could benefit from the rebasing provisions, meaning that only gains that have arisen since April 2017 would be subject to tax.
Again, we can advise on the most tax-efficient approach for your circumstances.
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