The last few years has seen an increase in the number of clients investing and holding cryptoassets, and recent research has shown that this reflects a trend that has not shown any signs of slowing, despite the cryptocurrency market being significantly down on its all-time high. Around 2.3 million individuals invested in or used cryptocurrency and digital assets in 2021, up from 1.9m in 2020.
MPs on the All-Party Parliamentary Group (APPG) on cryptoassets released their report last week, requesting the government to introduce tougher regulation on cryptocurrency, and appoint a crypto tsar to oversee the sector. The APPG stress there remain a number of ‘potential barriers’ to the UK fulfilling its vision to become a global cryptocurrency and digital asset hub. The inquiry listed fifty-three recommendations for the government to introduce within the next 12 to 18 months to avoid the UK ‘falling behind’ other countries in relation to the regulation of the cryptoasset sector. One of those recommended that HMRC release a ‘clear framework’ for the taxation of cryptocurrency and digital assets – particularly as the UK’s tax regime was written when crypto did not exist.
The report said: ‘Whilst the APPG welcomes the steps taken by the government thus far on the taxation of cryptocurrency and digital assets, the inquiry heard that there remains a need for further clarity for investors in relation to the UK’s tax framework. ‘The government should consider issuing updated guidance on the taxation of cryptocurrency and digital assets in the UK and also consider a comprehensive tax framework which ensures that the UK remains internationally competitive, provides clarity for investors and generates appropriate revenue.’
At Harbour Key, we are witnessing the engagement in cryptocurrency growing, but find that clients do not understand record keeping requirements and their UK tax reporting obligations.
HMRC first published their Cryptoasset Guidance Manual in March 2021, however this has not always kept up to speed with the fast-changing cryptocurrency landscape.
Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be:
- Transferred;
- Stored;
- traded electronically.
There are different types of cryptoassets, which work in different ways. The main types of cryptoasset include:
- Exchange Tokens – used as means of payment or holding as investment.
- Utility Tokens – used to gain access to goods or services on a platform.
- Security Tokens– provide the holder with rights or an interest in a business.
- Stablecoins - coins ‘pegged’ to a FIAT currency (a government-issued currency that is not backed by a physical commodity, such as gold or silver) such as US Dollars. These are often used as the entry point for acquiring other types of cryptoassets.
Cryptoassets are bought and sold on exchanges, and exchange fees are incurred when buying and selling cryptoassets.
HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out in the Government’s Cryptoasset Taskforce report.
Record keeping
Whether you are trading in cryptocurrency or buying and selling as an investor (either as an individual or as a business), there is a legal requirement to maintain a record of all transactions.
Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when accounts and/or tax returns are being prepared. The onus is therefore on the individual/business to keep their own records for each cryptoasset transaction.
Information that must be retained includes:
- the type of cryptoasset;
- date of the transaction;
- if they were bought or sold;
- number of units involved;
- value of the transaction in pound sterling (as at the date of the transaction);
- cumulative total of the investment units held;
- bank statements and wallet addresses in case these are needed for an enquiry or review.
Cryptocurrencies for individuals
Individuals who hold cryptoassets as a personal investment will usually be subject to Capital Gains Tax when they dispose of a cryptoasset. A disposal can include:
- selling cryptoassets for money;
- exchanging cryptoassets for a different type of cryptoasset;
- using cryptoassets to pay for goods or services;
- giving away cryptoassets to another person (unless it’s a gift to their spouse or civil partner).
For each disposal, deductible costs include the consideration originally paid for the asset, transaction fees paid for the acquisition and disposal, and any other selling fees such as legal fees or advertising costs.
Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from their employer as a form of non-cash payment (through PAYE).
It should be noted that if cryptoassets are received through mining, transaction confirmations or airdrops, that these are also subject to Income Tax (as miscellaneous income) based on the value of the cryptoasset at the time of receipt. It is therefore important to keep full records of the value of cryptoassets at any time there is a transaction or event.
There may be cases where an individual is running a business which is carrying on a financial trade in cryptoassets and they will therefore have taxable trading profits. This is likely to be unusual, but in such cases Income Tax rules would take priority over the Capital Gains Tax rules (the income, less expenses, will be subject to Income Tax and National Insurance in the same way as a sole trader).
When calculating the base cost for any cryptoasset disposals, the same rules apply as for disposals of shares (called pooling).
Cryptocurrencies for businesses
Businesses who hold cryptoassets as a business investment will usually be subject to Capital Gains Tax or Corporation Tax on Chargeable Gains (for Companies) when they dispose of a cryptoasset.
As with individuals, there may be cases where a business is being run which is carrying on a financial trade in cryptoassets and they will therefore have taxable trading profits. This is likely to be unusual, but in such cases Income Tax or Corporation Tax rules would take priority over the Capital Gains Tax or Corporation Tax on Chargeable Gains rules. For businesses who are trading in Cryptoassets, profits from the trade must be calculated under UK Generally Accepted Accounting Practice (“UK GAAP”).
Whilst for companies the categorisation of the gains and losses will be different, the same rate of Corporation Tax will apply (main rate of 25%).
Cryptoassets received through mining, transaction confirmations or airdrops, with either be subject to Income Tax or Corporation Tax (as miscellaneous income) based on the value of the cryptoasset at the time of receipt.
It should be noted that as HMRC do not consider cryptoassets to be money, the loan relationship rules for companies will not apply to cryptoasset transactions, unless used as collateral for an actual money loan.
Whether a cryptoasset meets the definition of an intangible asset for Corporation Tax purposes is slightly less clear, however is unlikely in most cases.
When calculating the base cost for any cryptoasset disposals, the same rules apply as for disposals of shares (called pooling).
Other tax considerations
Employer pension contributions
As HMRC does not consider exchange tokens to be currency or money, they will not count for the deduction provisions (tax relief) that exist under the registered pension schemes (RPS) tax rules for employer contributions paid to such schemes.
Stamp Duty
For transfers of exchange tokens to fall within the scope of Stamp Duty or Stamp Duty Reserve Tax (“SDRT”), they would need to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’ respectively. HMRC’s current view is that existing exchange tokens would not be likely to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’.
VAT
VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens. The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.
HMRC and regulatory powers for cryptoassets
HMRC’s information powers
HMRC can make information requests from exchanges under the powers conferred in Finance Act 2008 or Finance Act 2011, which means that if cryptoassets are held on exchanges, this information can be accessed by HMRC and has been historically.
HMRC officers working criminal cases can obtain data through a number of different routes, including:
- General Data Protection Regulation (GDPR);
- Mutual Legal Assistance Treaty (MLAT);
- European Investigation Order (EIO);
- Production Order (PO).
Regulation and anti-money laundering
The Financial Conduct Authority (FCA) is the anti-money laundering supervisor for businesses performing certain activities. The activities that come under the regulatory perimeter are:
- Cryptoasset exchange provider;
- Cryptoasset ATM;
- Peer to Peer providers;
- Issuing new cryptoassets;
- Custodian wallet providers;
These categories of business are ‘obliged entities’ under the new AML legislation, bringing them into line with traditional financial institutions such as banks. This means businesses in this sector will be obliged to implement measures to counter money laundering. Some examples are:
- Undertaking customer due diligence, also known as Know Your Customer (KYC);
- Ongoing monitoring to ensure that all transactions are consistent with the business’s knowledge of the customer, the customer’s business and risk profile;
- Transaction monitoring and the reporting of suspicious transactions through Suspicious Activity Reports;
- Taking steps to identify and assess risks of money laundering.
Summary
On its own, owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activities. Cryptoassets themselves remain unregulated, however this is expected to change in the future. It should also be noted that HMRC have the ability to seize cryptoassets (and have already done so) as part of criminal investigations.
Investments in cryptoassets are still viewed as high risk and are not protected under the Financial Services Compensation Scheme (“FSCS”).
In addition, there is still a regular stream of cryptoasset related scam stories, either in relation to stealing crypto assets from owners, or using cryptoassets as part of a larger scheme to steal money from individuals and businesses.
Due to the high-risk nature of cryptoassets, and the ability to keep them hidden when not held on an exchange, they are seen by the FCA as high risk from a money-laundering perspective.
When considering whether to invest in cryptoassets, there are a number of considerations to make before starting out, including making sure that you have full awareness of the risks (and taking independent financial advice if desired) and you are also fully aware of the detailed record keeping requirements.
Finally, if you have undertaken a number of transactions, and require assistance with reporting these to HMRC, this can be a time-consuming exercise to prepare. You should consider either preparing these calculations yourself or building in the additional compliance costs into your decision-making process for investing in Cryptoassets.
