Have any of your clients received ‘nudge’ letters from HM Revenue & Customs asking them to review their cryptoasset transactions and ensure they have declared them correctly on tax returns?
HMRC can access data on who is invested in cryptoassets through data requests to UK-based cryptocurrency exchanges. The letters, which were due to start going out in November, will nudge investors to check they are paying the correct amount of income and capital gains tax on any revenue from their cryptoasset holdings.
Helpfully, HMRC have published detailed guidance in their Cryptoassets Manual to assist individuals and their advisers when applying tax law to cryptoassets. The manual explains the tax consequences of different types of transactions involving cryptoassets. You can find and download this on the gov.uk website, but here is a summary of its main points.
To begin with, tax is payable on any profit received from the disposal of cryptocurrencies. This includes when they are:
- Sold;
- Exchanged for another cryptoasset; or
- Used to buy goods or services.
There are several myths around the taxation of cryptoassets in the UK. The first is the idea that they fall outside the scope of UK taxation because they are seen as a ‘winning’, in the same way that prize money from gambling or playing the lottery might be treated. That is not correct.
What are cryptoassets?
The Cryptoassets Manual explains in detail what HMRC considers to be cryptoassets, or as you may know them, cryptocurrencies. In effect they are a secured digital representation of an actual value or a contractual right that can be:
- Traded electronically.
- Transferred.
- Stored.
If you look, you will find thousands of cryptoassets out there. They are not regulated and there is no central bank or government to manage the system or step in if something goes wrong.
Transactions are recorded on a public ledger that uses technology to record details of any transactions in multiple places at the same time. Cryptoasset exchanges can be based in the UK or overseas and they do not have common standards in place between them. Assets are stored in a ‘virtual wallet’, which may or may not be secure. There is a level of concern that they may be exploited by cyber criminals.
If you want to know more about the different types of cryptoassets, the Cryptoassets Manual is a great starting point. The manual classifies cryptoassets into four areas:
- Exchange tokens;
- Utility tokens;
- Security tokens; and
- Stablecoins.
How are cryptoassets taxed in the UK?
Cryptoassets are taxed according to their nature and how they are used, rather than the definition of the asset.
The vast majority of cryptoasset investors who live in the UK are potentially liable to CGT on any profits or gains from any disposals that they may have made. CGT is only payable if total gains from all relevant assets are above the annual exempt amount (tax-free allowance), which is £12,300 in 2021-22.
In rare circumstances, revenue from cryptoassets may fall under income tax rules, for example if the investor is:
