Posted on: 3rd January 2019

HMRC confirms its position on cryptocurrencies

HMRC have finally published a Policy Paper, together with guidance, explaining how individuals who hold cryptocurrencies will be taxed. Previously, the only information published by HMRC was their 2014 Brief and an overview of the Capital Gains Tax aspects published in their manual. The Policy Paper published on 19 December 2018 is welcomed clarification of HMRC’s position on the tax implications for individuals holding cryptocurrencies.

HMRC’s position on cryptoassets and gambling

HMRC have stated that they don’t consider cryptocurrencies to be currency or money but tokens; using the term cryptoassets, rather than cryptocurrencies, throughout the Policy Paper. They have also said that they consider the “vast majority” of individuals that hold cryptoassets will be doing so for the purposes of “personal investment, usually for capital appreciation in its value or to make particular purchases.” Therefore, the “vast majority” of individuals holding cryptoassets will be liable to Capital Gains Tax. The fact that most people holding cryptoassets are liable to Capital Gains Tax is not news to us. However, one thing which some of you who are considered amongst the “vast majority” may not be happy to hear HMRC say is that:

“HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.”

In working with people who have bought and sold cryptoassets, we have been frustrated with the fact that our only point of reference was the 2014 Brief. The 2014 Brief stated that HMRC would look at those buying and selling cryptocurrencies on a case by case basis and “depending on the facts a transaction may be so highly speculative that it is not taxable”, as it would be considered similar to gambling. We discovered the hard way that HMRC weren’t willing to consider a speculative argument in the majority of cases. Nor were they forthcoming in providing further guidance or an update to their 2014 Brief. Whilst a lot of people will be disappointed that HMRC have now confirmed that they do not consider the buying and selling of cryptoassets to be gambling, at least we are all now clear on their position.

Capital Gains Tax

For those liable to Capital Gains Tax when they sell cryptoassets, the guidance which accompanies the Policy Paper provides details of how to pool the cost of tokens that have been purchased. The purpose of this is to calculate the cost that should be deducted when you dispose of cryptoassets from your holding. It should be noted that the charge to Capital Gains Tax arises on the date that cryptoassets are disposed of. A disposal takes place and a charge to Capital Gains Tax arises when cryptoassets are either sold or exchanged for other cryptoassets. A common misconception is that there is no charge to tax until the individual converts the proceeds arising from the sale of cryptoassets into fiat and puts this money into their UK bank account. The liability to Capital Gains Tax arises on the date of disposal. This is the date that you sell or exchange cryptoassets for other cryptoassets; and not the date you transferred the proceeds from the sale of cryptoassets into your bank account. It is vital to keep records of your transactions, please see HMRC’s guidance for further details.

Income Tax

HMRC’s Policy Paper focusses on individuals who buy cryptoassets for investment purposes and have no intention of becoming involved in financial trading activities. As with all financial instruments, be they shares, CfDs, Forex, cryptocurrencies or something else, if you’re involved in financial trading activities and carry out these activities in a way which HMRC consider to be the carrying on of a business activity, then you will be liable to Income Tax on the profits derived from this self-employed financial trading business.

If you receive cryptocurrencies from mining, this will be treated as income liable to Income Tax. If HMRC thinks that the way in which you carry out your mining activities amounts to a self-employed business activity, then you will have to register as self-employed. If you are mining and you’re not self-employed, you must report the income you receive from mining as other taxable income on your tax return.

The way we determine whether financial trading or mining activities amount to a self-employed business is to review the Badges of Trade contained within HMRC’s internal guidance manual. Please see the link below:

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim20200

If you’d like any assistance reviewing your specific circumstances against the Badges of Trade to determine whether your activities will be considered a self-employed business by HMRC, please get in touch.

References:

https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals

https://www.gov.uk/guidance/check-if-you-need-to-pay-tax-when-you-sell-cryptoassets

https://www.gov.uk/guidance/check-if-you-need-to-pay-tax-when-you-receive-cryptoassets