Crypto Assets and Tax
Over the last few years cryptocurrency has made headlines on a regular basis, and whilst that news hasn’t always had a positive spin, it has generated great interest from people of all different backgrounds – but how do we class cryptocurrency and how do we account for it?
Most cryptocurrency products, including the well-known options such as Bitcoin or Ethereum, advertise themselves as a regular currency much like any other to be used in exchanged for goods or services. Initially, this is how they were used, with the very first commercial transaction made using Bitcoin in 2010 - in exchange for pizza.
However, in more recent years the number of cryptocurrencies available has increased vastly, with prices ranging from fractions of a penny to tens of thousands of pounds for a single token. Due the now highly volatile market and ever-increasing sums involved, public perception has moved away from the idea that they are currencies to be used like any other, and HMRC takes a similar view - that cryptocurrencies are speculative assets much like a shareholding, and therefore individuals are subject to capital gains tax upon their sale.
So, what if you are holding cryptocurrency assets and you are ready to sell? There is no specific tax legislation for cryptocurrency at present, and only a single tax manual to describe their treatment, so instead we are to rely on the pre-existing method of pooling the tokens to work out the cost of acquisition and calculate the capital gain. Let’s take an example:
An investor has been purchasing Bitcoin in small amounts since 2016, but they now decide it is time to sell some of them. This will create a realisable gain since the value of their Bitcoin has increased in over the last few years. They have purchased the tokens intermittently, and as such they paid different amounts for their Bitcoin as its value changed during this time. So how do we work out what the value of the tokens sold should be? The tokens would be considered sold in the following order:
1. Any tokens purchased on the same day as the disposal.
2. Any tokens purchased within 30 days following the disposal (if UK Resident).
3. Any tokens in what is called theSection 104 pool – that is a pool of the remaining tokens purchased prior to disposal, with their value calculated from the total cost of the acquisitions divided by the amount of tokens purchased.
Once these costs are considered, we can look at other possible costs – such as exchange fees paid on the purchase or sale of their tokens. The total cost of the acquisition would then be deducted from the disposal proceeds to work out the total gain, and any tax due. If you're Interested in Capital gains tax on property clickhere.
Whilst the majority of focus on cryptocurrency has been on its value and treatment as an asset, it does of course need to be generated somewhere. Cryptocurrencies use a decentralised ledger over a peer-to-peer network of ‘miners’ who verify the transactions using their computer’s hardware. Through this process the miners are rewarded with small amounts of the relevant cryptocurrency.
For some, this has translated into a pastime with only small amounts to be accounted for, whilst for others a huge industry, with one company even purchasing a whole power plant in New York State to power their mining operation. For cryptocurrency miners then, there are other, more traditional costs involved, such as computer hardware and as the power necessary to keep all these components running. In larger cases this may also include rental of a premises and a wide variety of other costs that are more associated with a trading business.
HMRC has realised this, and notes in their manual; “Whether such activity amounts to a taxable trade (with the tokens as trade receipts) depends on a range of factors such as:
- degree of activity
So, mining cryptocurrency can be counted as a trade with the appropriate tax treatment and associated costs allowable, but only if HMRC deems the above factors met for it to be treated as such. There does not seem to be a defining threshold or measurement for this, so it appears to be at HMRC’s discretion.
This would likely mean that a good number of hobbyist miners would not be considered traders. Instead, HMRC recommends to them that the pound sterling value of the tokens of the time of their receipt should be considered as miscellaneous taxable income, with “appropriate expenses reducing the amount chargeable”.
An NFT or ‘non-fungible token’ is a different kind of crypto product that has come to prominence in the last 12 months. In short, an NFT is a digital asset, such as an image or video, that is stored as data and that uses similar technology to cryptocurrency in order to give the asset a verifiable public proof of ownership.
Some NFTs have been exchanging hands for tens of thousands, and in some cases, millions of pounds for more well-known images and artwork, yet HMRC mention NFTs only once in their manual - which is only to describe them as separate assets to other pooled tokens. Whilst no conclusions can be drawn from this, we could infer that an NFT would be treated as a single asset for capital gains purposes, though whether or not they are classed as artwork or as shares like other crypto products remains to be seen. Hopefully there will be some more specific guidance for these to come.
Overall, there is a lot to consider from a tax perspective if you are considering getting involved with cryptocurrency or if you already hold crypto assets, and much of this is a bit vague at present. We would recommend speaking with an accountant to help yourself navigate the tax rules for crypto assets.