Without a doubt, some of the most frequent questions we hear from clients involve how their Bitcoin or cryptocurrency will be taxed. In this blog post, we would like to provide answers to a few of these questions.

HMRC first released its Cryptoassets Manual in December 2018. The manual presents the government department’s most up-to-date view on how cryptoassets — a category that includes cryptocurrencies and a range of other digital assets — should be taxed.

In a previous post on our Knowledge Base, we explored this issue as it applies to businesses. Today, we will focus on Cryptoasset taxation for individuals.

What are cryptoassets according to HMRC?

Also referred to as ‘coins,’ ‘tokens,’ or ‘cryptocurrencies,’ HMRC defines cryptoassets as secured digital representations of value or contractual rights that make use of some form of distributed ledger (blockchain) technology.

What cryptoassets does HMRC recognize?

1. Exchange Tokens: assets that are intended to be used as a means of payment. These are the tokens that would be more widely thought of as ‘cryptocurrencies,’ such as Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP). Ethereum may also be considered an exchange token, although it may fit better in the next category.
2. Utility Tokens: assets that are issued by a company that has committed to accepting the assets as payment for goods or services in the future. These tokens are frequently issued as a form of fundraising in initial coin offerings (ICOs) and can be traded on exchanges or peer-to-peer.
3. Security Tokens: assets which entitle the owner to particular rights or interests in a business, such as a share in ownership, in profits, or in the future repayment of a sum of money. HMRC intends to address the tax treatment of security tokens in future guidance. We will update this post when that occurs.
4. Stablecoins: Tokens that function in much the same way as exchange tokens while being ‘pegged’ to another asset that is thought to have a stable value. Tether (USDT) is perhaps the most well-known example of a stablecoin, with a value more or less equal to the United States dollar. Despite the separate categorization, it seems HMRC largely treats stablecoins as exchange tokens.
5. Non-Fungible Tokens: HMRC recognizes NFTs as cryptoassets which are separately identifiable.

Importantly, HMRC’s tax treatment of these types of tokens is dependent on how the token is used, not on the definition of the token. An exchange token that is used as a security will be treated as a security. Furthermore, none of these token types are considered to be money equivalents.

Which taxes apply to individuals who use crypto?

HMRC takes the view that in most cases “individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases.” In these cases, they will be liable to pay capital gains tax. Individuals are also required to pay income tax and national insurance contributions on cryptoassets received from employers or from mining, transaction confirmations, and airdrops.

How are capital gains taxes on cryptocurrency calculated?

Capital gains taxes are paid on the difference between the buying and selling price of assets.

Often, the purchase costs of a single asset bought at different times vary drastically. For example, token A may have been purchased for 100 pounds in 2014. Later, the same investor may have increased their portfolio by two tokens in 2019, paying 1000 pounds. In 2020, they may have purchased another five tokens for 3000 pounds.

In situations like this one, HMRC makes use of a share pooling method that defines the buying price at the time of withdrawal for the asset as its average acquisition cost. Since eight token A were purchased for 4100 pounds, the acquisition cost for tax purposes would be 512.5 GBP.

Each cryptocurrency owned is grouped into its own pool. To illustrate, in a portfolio that includes Bitcoin, Ripple, and Litecoin, there would be three pools. It does not matter that these are all “exchange tokens.” Following a hard fork, new tokens need to be grouped into their own pools. So, if Bitcoin were to fork, the original token and the ‘new’ token on the main chain should each be considered separate assets.

In short-term trades, “same-day” and “bed-and-breakfast” rules may be applied. As NFTs are separately identifiable, they do not need to be — and indeed cannot be — pooled.

What records should crypto users keep?

HMRC recognizes that all cryptoasset transactions are permanent and publicly available for audit on their respective blockchains. As a result, the department accepts transaction readouts from blockchain explorers as records of transactions.

Crypto users must also maintain records of withdrawals. In case of an enquiry, users must be ready to show documentation of every access to fiat currency, such as from deposits into bank accounts or withdrawal from an ATM.

What does HMRC have to say about crypto traders?

HMRC has left a lot of grey area regarding this question, unfortunately. In the manual, they claim that they will only consider individuals who buy and sell tokens with a high degree of frequency and sophistications in “exceptional circumstances.” If an individual’s activity should be determined to be trading, then income tax will be prioritized over capital gains tax.

In what currency are taxes calculated?

All tax calculations are carried out in pounds sterling. If an exchange token transaction is undertaken on an exchange that does not display a value in pounds, an appropriate exchange rate must be established in accordance with the Generally Accepted Accounting Practice (GAAP).

Do foreign currency rules apply to crypto transactions?

No. Since HMRC does not consider cryptoassets to be money or currency, these rules do not apply.

Will I be taxed for buying cryptocurrency?

The purchase of cryptocurrency is not considered a taxable event in the UK. Held cryptocurrency will also not be taxed.

Will I be taxed for selling cryptocurrency?

Yes. Any trade of cryptocurrency for fiat is subject to capital gains tax.

Are crypto-for-crypto trades taxable?

Yes. Exchanging one cryptoasset for another is considered a taxable event. Taxes must be paid at the market value in pounds sterling of the token received.

Does this apply to stablecoins, too?

Yes. As far as we can tell, HMRC treats stablecoins the same as exchange tokens.

Will I be taxed if I move assets between my wallets?

Moving cryptoassets between wallets does not constitute a taxable event. However, records should be kept of these transfers in case of audit.

How is staking taxed?

HMRC recognizes that certain types of consensus require the ‘staking’ of tokens and that this practice is a means by which to earn a yield of held assets. If the activity leads to a sale of new tokens received, any withdrawn funds may be subject to income tax. If the investor chooses to keep the awarded assets, they may be required to pay capital gains tax at the time of withdrawal.

How are airdrops taxed?

Since cryptoassets received through an airdrop are generally not given in exchange for a service, they are not subject to income tax. However, the sum received during their eventual sale may be liable to capital gains tax.

Can I write off cryptocurrency losses?

Yes. An individual who has been determined to be trading may be eligible to reduce their income tax liability by writing off losses.

Can I declare profits or losses from lending cryptocurrency?

No. HMRC does not consider exchange tokens to be “money.” As a result, lending out such tokens does not constitute a “loan relationship,” and any gains or losses, even if described in pounds sterling, cannot be declared as income.

What if I use my cryptocurrency as collateral to borrow fiat?

Fiat loans backed by exchange tokens qualify as loan relationships. Profits and losses should therefore be reported.

Can I deduct charitable contributions made in cryptocurrency?

Yes. Cryptocurrency donations made to charitable organizations are usually not subject to capital gains taxes.

Am I required to pay stamp duty on cryptocurrency transfers?

No. Exchange token transfers generally do not meet the definition of “stock or marketable securities.”

At Altercap, we specialize in helping retail, professional, and business investors started with cryptocurrency. Of course, understanding how taxation works for digital assets is an essential part of this process. To learn more, contact us here.