What are Cryptoassets and how are they taxed?
What are they?
HMRC says “Cryptoassets also referred to as tokens or cryptocurrency are cryptographically secured digital representations of value or contractual rights that can be transferred, stored, traded electronically.”
Bitcoin is probably the most well known of cryptoassets, but we now also have utility tokens, security tokens, platform tokens and Non-fungible tokens [NFT’s].
How are they taxed?
HMRC is very clear on the basis of taxation and regards the buying and selling of cryptoassets as within the charge to Capital Gains Tax [CGT] for individuals and Corporation Tax [CT] for companies. HMRC’s view is that, in most cases, individuals will hold cryptoassets as a personal investment and would therefore be liable to CGT on disposal. It should also be borne in mind that a disposal of a cryptoasset occurs when it is sold for money, exchanged for another cryptoasset or used to pay for goods and services or given away to another person. HMRC makes it clear in its guidance that only in exceptional circumstances will HMRC accept that buying and selling of cryptoassets amounts to a trade for tax purposes and taxed under Income Tax [IT] rules.
Furthermore, HMRC views different types of cryptoassets as separate assets for CGT purposes. For instance, the swapping of a Polkadot token for Bitcoin, will realise a disposal for CGT purposes even if no actual currency has been received.
Individuals who are involved in mining and validating transactions as well as staking and yield farming would also be within the scope of taxation. For example, if they are rewarded either through the receipt of fees and/or cryptoassets, these rewards will be subject to Income Tax, but whether that is as trading income or not will depend on the facts and a consideration of the trading versus investment principles.
The very nature of cryptoassets is that they are decentralised and digital in nature and do not have a physical location or exist anywhere. That said, determining the location of such assets is important for tax purposes and especially for UK residents, non-UK domiciled taxpayers as it can alter the tax position significantly.
HMRC’s view is that an exchange token is located wherever the beneficial owner is resident, and accordingly, if the Bitcoin owner is resident in the UK, then the cryptoasset is located in the UK too. If a UK resident, non-UK domiciled individual personally purchases cryptoassets using their untaxed foreign income or gains, they may have remitted those funds into the UK and triggered a tax liability on purchase. Furthermore, if that individual goes onto dispose of those cryptoassets and realises a gain, that gain may be taxable in the UK also. Non-UK domicile UK resident individuals need to consider carefully their investment in cryptoassets and the tax consequences.
What information does HMRC have?
HMRC has already exercised its powers under Schedule 23 Finance Act 2011 and Schedule 26 Finance Act 2008 to obtain information from an exchange or a financial institution or obtain information from a third party to check the taxpayer’s tax position. WLH is aware that HMRC has already obtained information from one well known crypto exchange of the names and account information for individuals with UK addresses who received more than £3,000 worth of cryptoassets between 6 April 2020 and 31 December 2020. It is a given that HMRC has secured similar details from the other crypto exchanges.
A further source of information available to HMRC is via the money laundering legislation. These cover cryptoasset exchange providers, cryptoasset ATM’s and custodian wallet providers to name a few. Among these legislative requirements is the obligation to report any suspicious transactions through Suspicious Activity Reports [SAR’s]. Banks are already obliged to submit SAR’s where there is a suspicion of money laundering. Cryptocurrencies are generally considered a high risk area, so it is very likely that HMRC now has a wealth of information on people involved in these transactions.
What is HMRC doing?
HMRC has been issuing “nudge” letters to taxpayers they believe may have an unreported gains realised from cryptoasset transactions and WLH has seen examples of these. Furthermore, HMRC has formed a specialist team within its Fraud Investigation Service to undertake civil and criminal investigations and it has been reported recently in the media that HMRC has initiated 20 criminal investigations into this area.
Clearly HMRC sees cryptocurrency as an area of very significant interest and unreported income.
What should you do if you have a problem?
The first step is to establish if your investments in cryptoassets are tax compliant or whether you have a problem. If you do, HMRC offer a disclosure facility to assist individuals regularise a historic position. This is a complex area and will require a detailed analysis of the position including a review of all available evidence and a technical analysis of the tax position. This will also include details of what has gone wrong as this will have a bearing on the number of years that can be assessed and any penalty.
WLH Tax would recommend that anyone and who have concerns regarding the taxation of cryptoassets should get in touch without delay.