UHY Ross Brooke Chartered Accountants

A Simple Guide to the Taxation of Cryptoasset Exchange Tokens for Businesses

The world of blockchain and cryptoassets is developing at a fast pace and it is no wonder that the rules for the taxation of cryptoassets is only just developing with currently very little or no case law to turn to for guidance.

Recently HMRC have updated their guidance on the taxation of cryptoassets for both businesses and individuals. This article seeks to outline some of the rules that affect businesses and a similar article will cover the tax position of individuals holding cryptoassets for investment etc

Firstly, it is important to note that HMRC guidance only deals with the tax treatment of exchange tokens (e.g. Bitcoin). As yet it does not cover the tax treatment of security or utility tokens.

Any business that uses exchange tokens is liable to pay tax on the transactions. These transactions may include

  • Buying and selling exchange tokens
  • Exchanging tokens for other assets or cryptoassets
  • Mining
  • Providing goods and services in return for exchange tokens

Due to the nature of the transactions it is possible that the following taxes could apply to a given transaction:

  • Corporation tax
  • Income tax
  • National Insurance Contributions
  • Stamp Taxes
  • VAT

Some of the more common situations and issues are outlined in the following paragraphs.

The first issue to understand is that profits and gains etc must be reported to HMRC in pounds sterling, but by their very nature exchange tokens are rarely priced in pounds sterling. For tax purposes the business must therefore convert the value of exchange tokens into pounds sterling using an appropriate rate at the time of each transaction.

Where a company has elected to designate a non-sterling currency as its functional currency it must first translate the exchange tokens to the non-sterling currency using an appropriate rate and then translate that foreign currency into pounds sterling on its tax returns to HMRC.

If a business trades in exchange tokens or uses exchange tokens within its trade e.g. by accepting payment from customers or making payments to its suppliers, then the business will need to report the gains and losses as part of its trading profit.

If the activities do not amount to a trade, then the business will need to consider if other legislation applies.

Mining activities may be taxed in a number of ways. If the mining activities are organised to such an extent that it amounts to a trade, then any profits would be taxed as trading income. If the activities were less formal, then its likely to be taxed at miscellaneous income. If the miner keeps the assets for investment purposes, then any gains at a later date are likely to be subject to Capital Gains Tax or Corporation Tax when disposed of.

If an employee is paid in exchange tokens, then this will be subject to tax and national insurance. The exact treatment depends on whether the tokens are readily convertible assets. This is a complex area and the event of any doubt it is always best to see professional guidance on this matter.

Where tokens are used for the purchase or sale of goods VAT is due in the normal way using the pound value of the exchange token at the VAT tax point.   Transactions relating to exchange tokens themselves will be treated as follows:

  • Exchange tokens received by miners for their mining activities will generally be outside the scope of VAT
  • When exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
  • Charges made over and above the value of the exchange token that meet certain conditions (as defined in legislation) will be exempt from VAT

The above is not intended to be a comprehensive analysis of all the tax situations that may arise but merely an introduction to the more common questions that may arise.

We have a team of business and tax experts familiar with the taxation aspects of cryptoassets and if you have any questions regarding the taxation of cryptoassets then we would be happy to discuss this with you.

Find out more about crypto currency and tax and how we can help.

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