Tax on Cryptocurrency

Interest in cryptocurrencies is once again on the rise, with the values of Bitcoin and Ethereum hitting record highs in the past week, before falling back down again, even as the global economy continues to suffer the effects of the Coronavirus pandemic.

With the announcement that Uber are considering accepting certain cryptocurrencies as payment for their services, in line with other major companies such as Microsoft, Tesla and Lush, it is important to be aware of the tax implications of these transactions.

Capital Gains Tax on Cryptocurrencies

HMRC do not consider cryptocurrencies to be ‘currency’. Instead they classify them as ‘assets’. Almost all transactions carried out by individuals involving cryptocurrencies are therefore subject to Capital Gains Tax.

Capital Gains Tax is payable on the ‘disposal’ of assets. HMRC deem that the buying and selling of cryptocurrencies amounts to investment activity, in most case this is the same as the buying and selling of shares.

HMRC also consider that the exchange of cryptocurrencies for goods and services amounts to a disposal for Capital Gains Tax purposes. Every time you use cryptocurrencies to make a purchase, for example buying a game from the Microsoft Store, you must calculate the capital gain on the deemed disposal of the asset using the ‘barter transaction’ rules.

A disposal is also made when cryptocurrencies are gifted to another person and follows the same rules as the gift of any other asset.

HMRC have confirmed that in order to calculate the base cost of a cryptocurrency the same matching rules which apply to shares are to be used for cryptocurrency transactions. This means that each separate type of cryptocurrency held will be pooled together and upon a sale the base cost will be the average cost of the assets within the pool at that date of disposal.

This above rule will apply in the majority of cases, with the only exceptions being where a purchase and disposal are conducted on the same day or a purchase is made within 30 days of a disposal. In these cases, the base cost for the sale will be matched against the same day purchase then purchases made within 30 days of the disposal.

Capital Gains Tax must be paid if net gains from all capital transactions in the tax year exceed your annual exemption (£12,300 for 2020/2021), and the disposals reported on your Tax Return. Losses should also be reported, as they may be relieved against future capital gains.

Cryptocurrency platforms may not keep detailed records of each transaction and may not be able to provide details of older transactions. It is therefore the responsibility of the individual investor to keep a detailed record of any and all transactions involving cryptocurrencies, regardless of their nature. Per HMRC’s guidance these records must include:

• The type of cryptocurrency
• Date of the transaction
• Whether they were bought or sold
• Number of units
• Value of the transaction in pounds sterling
• Cumulative total of the units held

Income Tax on Cryptocurrencies

While in the majority of cases the disposal will be liable to Capital Gains Tax, there may be some instances where income tax could apply.

If your employer were to pay you in cryptocurrency then this would be subject to income tax and national insurance contributions.

Where an individual is ‘mining’ the cryptocurrencies then this could be considered to be a trading activity particularly where there is a large degree of activity and commerciality involved. Where fees are received for ‘mining’ then these are subject to income tax either as trading income or miscellaneous income.

The term cryptocurrency  mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a public record ledger known as a blockchain.

Cryptoassets

Note that the tax treatment of transactions involving cryptoassets follow the same rules as for cryptocurrencies.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.

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