Holders of cryptoassets need to be aware of the tax implications, whether they are trading or mining.
Bitcoin is probably the most well-known of cryptoassets, but the industry has come along way since the first open-source Bitcoin was released in January 2009. The term cryptoassets now encompasses all types of cryptocurrencies and tokens. With huge sums and gains often being involved in the buying and selling of cryptoassets and the volatility of the market, HMRC has been producing guidance on the topic of cryptotax since 2014, but its most substantial guidance was only published earlier last year.
The starting point for determining taxation is whether the cryptoholder is trading or investing.
Generally speaking, HMRC believes that individuals hold cryptoassets as a personal investment and as such, are liable for capital gains tax on any profits made above the annual exemption amount. With such volatility in the market over the last 12 months or so, and prices hitting a record high in April 2021, those who sold at the top will be facing hefty tax bills. Shortly after that peak, prices dropped significantly and some by as much as 50%. If investors sold for a loss, this can be set off against other gains to reduce overall capital gain.
Should Cryptoholders be buying and selling tokens at a level that HMRC considers them to be trading, then they will be liable for income tax instead of capital gains tax. There is no clear-cut point at which an individual is trading, but for tax purposes, those involved in mining and validating transactions, or taking, and yield faming are more likely to be treated as if they are trading.
Another critical factor in crypto taxation is where the assets are deemed to be located. This is not straight forward as they very nature is that they are digital and not physically located anywhere.
However, it is an incredibly important point for UK resident non-UK domiciled individuals, as they generally do not pay income tax or capital gains tax on non-UK income and profits, unltess it is later sent to the UK. Therefore, the location, or situs, of assets can have dramatic consequences on the amount of tax to be paid by these individuals. The manual suggests that Cryptoassets are located where the beneficial owner is resident, meaning that if the individual lives in the UK, then the asset is located in the UK too, and taxed as such. The publication of the manual has led to a renewed focus on HMRC’s information gathering powers. It notes that under schedule 23 of Finance Act 2011 or schedule 36 of Finance Act 2008, HMRC can request information from crypto exchanges. It is also able to make requests through the Mutual Legal Assistance Treaty, European Investigation Order, and General Data Protection Regulation (GDPR).
A recent Freedom of Information request revealed HMRC has used it’s powers to gather information about customer’s transactions; exercised rights to request information from other tax administrations; received data from crypto exchanges about their users.
The increased regulatory focus on cryptoassets means it is likely that the manual will continue to be developed and could turn into the legislative framework that would clear up the uncertainty around taxation of digital assets, such as determining investors versus traders, and the situs of assets. HMRC is likely to continue making use of the powers it has to gather information from crypto exchanges about personal investments and holdings. Therefore, if you are in the fortunate position of having made a gain, then you should seek specialist legal advice.