Just before the start of this new 2021/22-tax year, HMRC announced changes to how crypto assets – those funds held in or earned through cryptocurrencies – are taxed. As a relatively new concept, there is a great deal of confusion about the legality and declaration requirements around crypto assets.
Please be aware that Cryptocurrency is a new industry and the rules around how any gains or losses are treated have not been fully tested or determined in any legal cases. This blog sets out how we consider HMRC will look to tax this emerging market.
Tax Rules Around Cryptocurrencies
HMRC has published guidance for people who hold cryptoassets (or cryptocurrency as they are also known), explaining what taxes they may need to pay, and what records they need to keep. HMRC has also published further information for businesses and companies about the tax treatment of cryptoasset transactions. The tax policy may evolve as the sector develops.
The new rules announced at the end of March have come under fire for failing to answer some of the critical questions and introduce only minor adjustments to the tax regime.
Some of the principal rules are as follows:
1) Exchange tokens, including bitcoin and other cryptocurrencies, are considered assets, and profits made from selling or trading these assets are taxable.
2) Individuals who buy cryptocurrencies will be subject to Capital Gains Tax on profits they have made.
Regular traders may be eligible to pay income tax on their trading income.
3) Crypto assets received as a payment for a service or employment must be liable for income tax and National Insurance contributions in the same way as if they were paid in cash.
With these new announcements, around 95% of the tax manual is unchanged. The changes are mainly related to the gambling status of cryptocurrencies or transferring coins between different ledgers.
Taxes on Cryptocurrency Investments
Buying or trading cryptocurrencies is widely debated – does it constitute a form of gambling, or is it an investment in an alternative currency? HMRC guidelines have confirmed that these activities are treated as an investment and do not fall under the remit of gambling for taxation purposes. This is another seemingly minor clarification that could have a significant impact on crypto traders.
Gambling income is not liable for income tax charges or CGT, and so were HMRC to have recognized cryptocurrency trades as a form of gambling, it would have stood to lose a substantial amount of tax revenue.
Capital Gains Tax on Crypto Asset Profits
For some time, there has also been contention about whether profits earned from cryptocurrency trading should be liable for income tax or charged at CGT rates. Under the current rules, such assets are liable for CGT, based on a similar system to profits from trading stocks and shares. Individuals who make regular, frequent trades and earn personal income from the business can, in particular cases, be liable for income tax instead.
The differentiating factor here is that a trader of crypto assets isn’t likely to have chosen this line of work solely for tax efficiencies, so there will be few circumstances where a change in tax bases will apply.
Activities where traders need to pay income tax and National Insurance include:
1) Being paid in cryptocurrencies for employment.
2) Making earnings through mining, transaction confirmation or airdrops.
HMRC will likely continue to issue adjustments to their cryptocurrency tax manuals as the industry develops and further consideration is given to the correct tax treatment of profits and gains arising.
In the meantime, if you need professional assistance with ensuring cryptocurrency gains are declared accurately, please contact us for further guidance.