Although trading or investing in cryptoassets (or cryptocurrency) may seem like a niche occupation, we are seeing increasing numbers of clients who have got involved, perhaps drawn by the prospect of high returns or the attraction of being involved in a cutting-edge arena. Just because it’s new, and as the name ‘crypto’ suggests, hidden, doesn’t mean that you don’t have to think about the tax reporting.
What are they? Cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically. There are lots of different types (tokens or coins) and lots of ways in which they can be used. You set up an online account, choose your digital currency and then invest, initially using a traditional currency.
Is it gambling? No - dealing in cryptoassets isn’t treated as gambling for tax purposes, which means that any return on your investment isn’t exempt. So, those returns will be subject to tax in some way.
Are you trading? Confusingly, transactions in
currencies are often referred to as ‘trades’ but this does not make your
activities a trade for tax purposes. In fact, cryptoasset trading is relatively
unusual, but if you are ‘mining’ where you use computer software to create new
cryptoassets; or if you are effectively a financial trader who trades in these rather
than stocks and shares; then you will be treated as trading for tax purposes.
Profits less expenses will be subject to income tax and class 2/4 national
insurance contributions. There are lots of established tests to see whether you
are trading so get advice if you think you’re in this position
Is it subject to income tax in another way? Again, this is less common. If your employer pays you in cryptoassets, it will be subject to income tax and class 1 NIC as with other forms of employed income. If you get income from ‘staking’ (putting up part of your holding in return for a reward) or ‘airdrops’ (receiving assets as part of a marketing or advertising campaign) then the return is treated as miscellaneous income and is subject to income tax.
What if I just invest in them? This is the most likely situation. Think of each type of cryptocurrency as if it were a shareholding for capital gains tax (CGT) purposes. Like shares, each cryptoasset holding is ‘pooled’ and you apply the usual CGT rules when you add/deduct to the pool.
The UK£ equivalent of the original price you pay is your base cost: if you move that type between different ledgers that isn’t a disposal but if you sell them; use them to buy other cryptocurrencies or give them to someone else, those are all disposals. The UK£ equivalent of their value at that point is your sales proceeds, from which you can deduct associated costs and your purchase price to give you either a capital gain or loss. If things go badly, you can even make a negligible value claim for a loss on a currency which has become worthless, provided you still own the coins. If your overall profits and/or gains are over the current reporting limits, you will need to include details on your tax return and pay tax on the gain or claim to use the loss.
This is a fast-moving area and although the new Manual helps, there are constantly new types of asset and transaction which need to be considered. There is also a concern that the lack of any specific legislation or regulation means that guidance cannot always be relied on. Make sure that you keep adequate records of all your transactions and report it properly on your tax return. If in doubt, get help!
This article deals with tax issues relating to cryptoassets in a general way and does not constitute investment advice. This is an unregulated, volatile area and you should seek specialist advice before entering into any investment.