Cryptoassets such as Bitcoin, Ethereum and stablecoins have become increasingly important for both investors and businesses. However, their treatment under UK law and taxation remains a developing area, with HMRC continuing to refine its approach as the technology and ways in which digital assets are used evolve.
How Does HMRC View Cryptoassets?
HMRC describes cryptoassets as digital representations of value that rely on cryptographically secured distributed ledger technology or similar technology to validate and secure transactions.
Different types of cryptoassets can have very different characteristics. These include exchange tokens such as Bitcoin, utility tokens, security tokens and stablecoins. How an asset is actually used and the circumstances surrounding a transaction can therefore be important when determining its tax treatment.
Are Cryptoassets Property?
Digital assets are capable of being treated as personal property under UK law. Recent legislation and court decisions have helped clarify the legal status of cryptoassets, although different types of digital assets can have different characteristics.
For example, the article considers how Bitcoin can consist of identifiable transaction outputs, while assets such as USD Coin and Ethereum may be treated as fungible assets. These distinctions can become particularly important in disputes involving ownership, fraud and the recovery of digital assets.
How Are Individuals Taxed on Cryptoassets?
For individuals, one of the key questions is whether activity involving cryptoassets represents investment activity or trading.
Where cryptoassets are held as investments, gains realised when they are disposed of will typically fall within the Capital Gains Tax regime. However, where an individual’s activities amount to a trade, profits may instead be subject to Income Tax.
Cryptoassets received through employment or other forms of income can also have separate Income Tax and National Insurance implications depending on the circumstances.
How Are Companies Taxed?
Companies carrying out activities involving cryptoassets can potentially be subject to Corporation Tax. This can include buying and selling tokens, exchanging cryptoassets for other assets, mining and accepting cryptoassets in return for goods or services.
The precise tax treatment depends on factors including whether the company’s activities constitute trading or investment and whether receipts are considered income or capital.
Are Cryptoassets Considered Currency?
HMRC does not generally consider cryptoassets to be currency or money. Although cryptoassets can be used as a means of exchange, their legal and tax treatment differs from conventional currencies.
This distinction can have important consequences when considering areas such as loan relationships, corporate taxation and the treatment of particular transactions.
Cryptoassets and Intangible Fixed Assets
For companies, cryptoassets may potentially be accounted for as intangible assets. However, this does not automatically mean that they qualify for the Corporation Tax intangible fixed asset regime.
HMRC’s position is that exchange tokens simply held by a company will not generally satisfy the requirement that an intangible fixed asset has been created or acquired for use on a continuing basis in the company’s activities.
Derivatives and Cryptoassets
Investors and businesses can also obtain exposure to cryptoasset markets through derivatives without directly owning the underlying cryptoasset.
HMRC distinguishes these arrangements from direct ownership because derivatives create contractual rights and obligations between the parties. Their tax treatment may therefore differ from transactions involving cryptoassets themselves.
Does HMRC Consider Crypto Trading to Be Gambling?
HMRC does not generally regard buying and selling cryptoassets as gambling. Whether a particular transaction could have the character of betting or gambling will depend upon the specific facts, but HMRC’s general position is that ordinary buying and selling of cryptoassets should not be treated in this way.
Where Are Cryptoassets Located for Tax Purposes?
One of the more complex issues surrounding digital assets is determining their location, or “situs”, because cryptoassets do not have a conventional physical location.
This can be particularly important when considering Capital Gains Tax and Inheritance Tax. Where a cryptoasset represents an underlying physical or intangible asset, the location of that underlying asset may determine its location.
Where there is no underlying asset, HMRC’s view is generally that the location of an exchange token should be determined by the residence of its beneficial owner. This remains a particularly important and evolving area of cryptoasset taxation.
An Evolving Area of UK Tax Law
The taxation of cryptoassets remains a developing area. The appropriate treatment can depend not simply on the name given to a token or transaction, but on the nature of the asset, how it is being used and what has actually taken place.
The full article examines these issues in considerably greater detail, including relevant legislation, HMRC guidance and recent court decisions.
For more detailed information, read HMRC’s full guidance on cryptoassets and their tax treatment.
Read HMRC’s Full Cryptoassets Guidance