CRYPTOCURRENCY
The disposal of a cryptoasset received through an airdrop may result in a chargeable gain for Capital Gains Tax, even if it’s not chargeable to income tax when it’s received. Where changes in value get brought into account as part of a computation of trade profits income tax will take priority over Capital Gains Tax.
INCOME TAX LOSSES An individual who is trading may be able to reduce their income tax liability by offsetting any losses from their trade against future profits or other income. If profits from activities are taxable as miscellaneous income, losses may be able to be carried forward to later years.
CAPITAL GAINS TAX HMRC would expect that buying and selling of cryptoassets by an individual will normally amount to investment activity (rather than a trade of dealing in crypto-assets). In such cases, if an individual invests in crypto-assets they will typically have to pay Capital Gains Tax on any gains they realise. Crypto-assets are digital and therefore intangible, but count as a ‘chargeable asset’ for Capital Gains Tax if they’re both: • capable of being owned. • have a value that can be realized.
WHAT CONSTITUTES A ‘DISPOSAL’ Individuals need to calculate their gain or loss when they dispose of their crypto-assets to find out whether they need to pay Capital Gains Tax. A ‘disposal’ is a broad concept and includes: • selling crypto-assets for money. • exchanging crypto-assets for a different type of cryptoasset. • using crypto-assets to pay for goods or services. • giving away crypto-assets to another person. If crypto-assets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For Capital Gains Tax purposes, the individual is treated as having received that amount of pound sterling even if they did not actually receive anything. If income tax has been charged on the value of the tokens received, section 37 Taxation of Capital Gains Act 1992 will apply. Any consideration will be reduced by the amount already subject to income tax. If an individual donates crypto-assets to charity, they will not have to pay Capital Gains Tax on them. This does not apply: • if they make a ‘tainted donation’. • where the individual disposes of the crypto-assets to the charity for more than the acquisition cost so that they realise a gain.
ALLOWABLE COSTS Certain costs can be allowed as a deduction when calculating if there’s a gain or loss, which include: • the consideration (in pound sterling) originally paid for the asset. • transaction fees paid before the transaction is added to a blockchain. • advertising for a purchaser or a vendor. NQ Magazine April 2019
• professional costs to draw up a contract for the acquisition or disposal of the crypto-assets. • costs of making a valuation or apportionment to be able to calculate gains or losses. The following do not constitute allowable costs for Capital Gains Tax purposes: • any costs deducted against profits for income tax. • costs for mining activities (for example equipment and electricity). Costs for mining activities do not count toward allowable costs because they’re not wholly and exclusively to acquire the crypto-assets, and so cannot satisfy the requirements of section 38(1)(a) Taxation of Capital Gains Act 1992 (but it is possible to deduct some of these costs against profits for income tax or on a disposal of the mining equipment itself). If the mining amounts to a trade for tax purposes the crypto-assets will initially form part of trading stock. If these crypto-assets are transferred out of trading stock, the business will be treated as if they bought them at the value used in trading accounts. Businesses should use this value as an allowable cost in calculations when they dispose of the crypto-assets.
RECORD KEEPING Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include: • the type of cryptoasset. • date of the transaction. • if they were bought or sold. • number of units. • value of the transaction in pound sterling. • cumulative total of the investment units held. • bank statements and wallet addresses, if needed for an enquiry or review.
SELF ASSESSMENT TAX RETURNS Many crypto-assets (such as bitcoin) are traded on exchanges which do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on the Self Assessment tax return. If the transaction does not have a pound sterling value (for example if bitcoin is exchanged for ripple) an appropriate exchange rate must be established in order to convert the transaction to pound sterling.
Other considerations Pensions: HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme. Inheritance Tax: Crypto-assets will be property for the purposes of Inheritance Tax. NQ
● This edited extract was taken from HMRC’s website 25