Michael Lansdell explains what a cryptoasset is, and how to handle it in accordance with HMRC rules.
Despite appearing frequently in the news, often as part of a story detailing an outlandish sum someone made whilst ‘mining’ bitcoin, cryptoassets are still surrounded by myth and misinformation. So, here’s our guide, including their tax treatment in the UK.
What are cryptoassets?
Simply, they’re digital or virtual assets, that have been cryptographically secured. You transfer, trade or store cryptoassets in a virtual wallet, accessed via a website or app, with transactions recorded in public ledger called a blockchain.
HMRC divides cryptoassets into the following:
- Exchange tokens, including the bitcoin. These can be used a means of payment and are popular with investors, because they may increase in value.
- Utility tokens, which provide the holder with access to goods or services on a particular platform. A business/group of businesses may issue utility tokens and commit to accepting them as payment, for example. They can also be traded, like exchange tokens.
- Security tokens. These give the holder rights or interests in a business, such as ownership.
- Stablecoins, designed to remain stable over time, without any discernible change in their value. To this end, the price of stablecoins is often pegged to something non-volatile, like fiat money (government-backed/issued currency).
What about the tax treatment of cryptoassets in the UK?
If you’ve heard that cryptoassets fall outside the UK’s tax laws, this is incorrect! HMRC consider them a ‘chargeable asset’; therefore, if you make a disposal of cryptoassets, you must check if capital gains tax (CGT) is due on any profits you make.
No disposal, no tax will be due. However! If HMRC gets information that you have exchanged one type of cryptocurrency for another, the transaction would be considered a disposal and would potentially be subject to CGT.
What about income tax? It this due on cryptoassets?
In some circumstances, yes. HMRC may take the view that the buying and selling of cryptoassets is generating an income, via trading. Under the UK tax system, profits from a trade are subject to income tax, not CGT. The golden rule is, as ever, do your homework before you fall into any traps. A business may also be liable to pay tax on activities involving exchange tokens. Again, when in doubt – check.
What about tax planning? Is this harder in the crypto world?
Often, a cryptoasset exchange may only keep records of transactions for a certain time. Therefore, for the purposes of completing a tax return, it is up to the individual to keep their own, detailed records for each transaction, which must include things like type of cryptoasset, date of the transaction and whether they were bought or sold. In the event of an enquiry by HMRC, the onus is on the taxpayer to present all the required information. Good planning will also mean you’ll have funds available to pay any GCT due, or absorb any losses.
So cryptoassets aren’t as confusing as they first appear. Even so, don’t get tripped up by some of the myths that are floating around. At Figurit we are tax experts, as well as having an exceptional knowledge of the principles of accounting. If you’d like to get involved in the world of crypto, we will help you stay compliant, whilst optimising your personal and business finances.
For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933.