Her Majesty’s Revenue & Customs just released a new policy paper outlining its most recent views on cryptoasset taxation for individuals. The department has clarified a number of policies, particularly in regards to capital gains and income tax.
UK Crypto Tax Filing Information
The HMRC defines three types of cryptoassets: exchange tokens (currency coins like Bitcoin), utility tokens (tokens issued by a business with utility uses), and security tokens (tokens that represent a form of equity in a business). The report’s guidelines apply to all forms of cryptocurrency, but it also acknowledges that for utility and security tokens, “different tax treatment may need to be adopted.”
Crypto is not considered currency or money but rather an asset. The HMRC recognizes that most individuals hold cryptoassets as personal investment, thus they will pay capital gains tax when they “dispose” of crypto — see below. You only have to pay capital gains tax on overall gains above the annual exempt amount of £11,700. If your total assets sold was over 4x this amount (£46,800), you still need to report the gains on your tax return regardless of the gains amount.
Individuals are liable for income tax for cryptoassets received via mining, airdrop, and confirmation rewards as well as cryptoassets received as salary from an employer. Furthermore, if an individual runs a business making profit from trading cryptocurrency, income tax rules take priority of capital gains.
Noteworthy in the report is that "HMRC does not consider the buying and selling of cryptoassets to be the same as gambling." The department had previously claimed that cryptocurrency transactions could be "so highly speculative" so as to not be taxed; however, this new report definitively closes any such loophole.
Crypto capital gains tax
You calculate gain or loss for capital gains tax when disposing of cryptoassets. The HMRC defines a disposal as selling crypto for fiat, exchanging one cryptocurrency for another cryptocurrency, and giving away cryptoassets to another person.
Regarding giving away cryptoassets: if the recipient is not the spouse or civil partner of the giver, the pound sterling value must be calculated and then treated as capital gains for the recipient, even if the cryptoasset is not converted to fiat. Cryptoassets donated to charity are not applicable to capital gains tax, unless the donation is more than the acquisition cost or unless the donation is a tainted donation.
Allowable costs can be deducted when calculating a gain or loss, such as the original purchasing amount, transaction fees, and professional costs (i.e. cost of drawing up trade contracts or appraisal costs) in relation to buying or selling cryptoassets. Mining costs cannot in most cases be deducted.
Pooling practices applied to shares and securities also apply to cryptoassets. Each cryptocurrency is kept in its own pool. The pound sterling originally paid for the crypto creates the pooled allowable cost, which changes as crypto of that type is acquired or disposed of.
If you sell a cryptoasset and then reacquire the same asset within 30 days, the newly acquired assets are given their own pool, and gain or loss is calculated within this new pool.
In the instance of a hard fork, any allowable costs stemming from the initial acquisition pre-fork will be split between the original and new forks.
Airdropped tokens go into their own pool unless the recipient already owns the same token. The value of the airdropped token does not come from an existing held cryptoasset.
Capital gains losses
If cryptoassets are disposed for less than their allowable cost (i.e. sold at a loss), then the loss can be deducted to reduce the overall capital gain. The loss must be reported to HMRC. TokenTax can help.
Income tax for cryptoassets
In the case of mining, transaction confirmation rewards, airdrops, or salary received in cryptocurrency, individuals will be liable for income tax and national insurance contribution.
Income tax can also apply to where an individual runs a business trading cryptoassets, thus having taxable trading profits. On this matter, the report says that the "HMRC will publish separate information for businesses in due course."
Fees and/or rewards from mining can either be income tax in the form of trading income or miscellaneous income depending on the degree of activity, organization, and overall commerciality. Cryptoassets received from these activities can then be subject to capital gains tax when their gains are realized.
Negligible value claims
In the event that a cryptoasset becomes worthless and/or untradeable, a negligible value claim can be filed in order to treat the asset as disposed of, and thus losses can be claimed.
If you lose your private key, a negligible claim can be filed only if it can be proven that there is no chance of recovering the key.
In the instance of theft or fraud, one cannot claim a capital loss. The only instance where the HMRC states a loss can be claimed is in the instance of being sold a cryptoasset that then becomes worthless. In which case, a negligible value claim can be filed.
The HMRC recommends keeping separate, individual records for cryptoasset transactions in the event that an exchange only keeps records for a limited amount or time or if an exchange shuts down before a tax return is completed.
Any gain or loss must be converted to pound sterling for the tax return, even in crypto to crypto trades. The HMRC says to use “consistent methodology” when making the pound sterling valuation, and records should be kept of what methodology is used.
Read the full HMRC report here.
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