It has been some time since HMRC last published any information about Cryptoassets (previously known as Cryptocurrency or the common version of Bitcoin) but they have been working hard to provide an update to their final report issued in October 2018.
On 19 December 2018, a detailed publication was issued on GOV.UK providing clarification on HMRC’s view about how individuals who have Cryptoassets should be taxed.
Generally, income from Cryptoassets will either be taxed as income or as tax on profits from a trade. HMRC continue to state that they expect few Cryptoasset traders to be in the market place, as the volume of transactions required to create a trade would be significant.
Many of us will have heard of mining in the sphere of Cryptoassets. Fees or rewards received in return for mining, will be charged to Income Tax, under miscellaneous income and not under the dividend regime, as previously thought.
If Cryptoassets are received as payment for services, then any disposal of these will be treated under the Capital Gains Tax regime.
This is where an individual can receive an allocation of tokens or other Cryptoassets, as part of a marketing or advertising campaign. Income Tax may or may not apply, depending on how they are received. Income Tax will be due if they are provided in return for a service as miscellaneous income or as a receipt of an existing trade. If however the air dropped Cryptoassets are received but not in relation to any service then no Income Tax will apply.
Disposal of any Cryptoassets received through an air drop, may result in a Capital Gains Tax charge on disposal.
Capital Gains Tax
What constitutes a disposal? In normal legislation this is a broad concept:
- Selling Cryptoassets for money
- Exchanging Cryptoassets for a different type of Cryptoasset
- Using Cryptoassets to pay for goods or services
- Giving away Cryptoassets to another person
There is often the situation where an individual may own Bitcoin, Ether and Litcoin and move their funds between these Cryptoassets and this would be deemed to be a disposal for each transaction.
Certain costs can be deducted as with any normal disposal, including consideration paid, transaction fees, professional costs and valuation fees but not the costs of mining activities, including equipment or electricity, as these cannot be wholly and exclusively attributed to purchasing the Cryptoassets.
HMRC do agree that Cryptoassets within the same type can be pooled for both asset and cost purposes.
If Income Tax has been charged on the value of the tokens received, any consideration will be reduced by the amount already subjected to Income Tax.
It is possible as with shares to claim negligible value loss if your Cryptoasset becomes worthless and this can be claimed under the normal rules for Capital Gains Tax purposes.
Cryptoassets received as Earnings
In general terms, any Cryptoassets received as earnings will count as “monies worth” and subject to Income Tax and National Insurance.
How this is attributed at the point of receipt depends on whether they are Readily Convertible Assets or non-Readily Convertible Assets. Either way, Tax and National Insurance will be due.
These earnings are not however considered relevant earnings for pension purposes.
Cryptoassets have their own trading exchange and so appropriate exchange rates have to be attributed to any transaction, in order to declare on the Self-Assessment Tax Return.
Although suggestions that transactions in Cryptoassets can be treated as gambling, HMRC clearly state in this policy paper that they will not accept this.
If you have any questions regarding this article, please contact the author or your local Lambert Chapman contact on 01376 326266.