Developments in the world of blockchain and crypto currency move fast and much has changed since HMRC’s original guidance on the subject of crypto currency published in 2014. In that original guidance there was a suggestion that dealing in crypto currency was so risky that it could be compared to gambling and therefore outside the scope of taxation. However, the revised guidance issue in December 2018 has definitely moved away from that stance and if you hold or intend to hold crypto currency then you need to be aware of the current taxation rules.
The new guidance only applies to individuals holding crypto currency and not other forms of crypto assets such as utility tokens or security tokens nor does it apply to businesses and companies trading in crypto currency for which further guidance is promised.
In most cases individuals holding crypto currency will be doing so for personal investment usually for capital appreciation or to make purchases. As an asset these will be liable to capital gains tax when they are disposed of either for cash, as part of a purchase, as a gift or in exchange for other crypto assets.
For capital gains tax purposes each purchase of crypto currency is added to a pool and each disposal deducted from the pool. Separate pools will be required for each different crypto currency. At the end of each tax year the taxpayer will need to calculate the gains or losses on each transaction in the respective pools and include the net total on his or her tax return. The taxable gain can be further reduced by the availability of certain allowable costs and allowances but these calculations can be complex and the advice of a suitably qualified accountant with crypto experience would be strongly recommended.
If an individual is paid by their employer in crypto currency then this will be subject to tax and national insurance in the normal way, using its pound sterling currency market value.
In exceptional cases individuals may be operating a business by trading in crypto currency in which case they will be subject to Income tax and National Insurance on those profits, rather than Capital Gains Tax. In such cases any trading losses will be available to offset against other income. Whether a person is trading or not is a question of fact and the Courts have previously identified “Badges of trade” which will help decide is trading is taking place for example, the length the asset is held, the frequency of transaction or the motive for the purchase, to name but a few. HMRC have said that they will publish separate information for businesses in due course
As with all self-assessment matters, record keeping is key and records of transactions should be kept and made available to HMRC if requested as part of a tax enquiry.
If you have any questions relating to the taxation of crypto currencies or need assistance with the preparation of your self-assessment return please contact our specialists Chris Davies email@example.com and Phil Kinzett-Evans firstname.lastname@example.org based at our Newbury office 01635 555 666