What has happened?
HM Revenue & Customs (HMRC) has set out its view on how individuals who hold cryptoassets are taxed. It stated that, in the majority of cases, individuals who hold cryptoassets as a personal investment will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
What does this mean?
Capital Gains – investment:
HMRC published its assessment of the applicability of UK tax legislation to cryptoassets held by individuals.
Although HMRC will look at the facts of each case and apply the relevant tax provisions, it stated that in the vast majority of cases, an individual will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
HMRC noted that it “would expect that buying and selling of cryptoassets by an individual will normally amount to an investment activity”, meaning Capital Gains Tax must be paid on any gains that are realised.
Despite cryptoassets being digital and therefore intangible, they count as a ‘chargeable asset’ if they are both “capable of being owned” and “have a value that can be realised”, the paper said.
To find out whether they need to pay Capital Gains Tax, individuals are required to calculate their gain or loss in pound sterling when they dispose of cryptoassets.
A ‘disposal’ includes selling cryptoassets for money, exchanging for a different type of cryptoasset, using them to pay for goods or services and giving them away to another person.
However, if an individual misplaces their private key, the cryptoassets will still exist, meaning this does not count as a disposal for the purposes of Capital Gains Tax.
HMRC also examined the tax treatment of new cryptoassets acquired through a hard fork in a blockchain.
“The value of the new cryptoassets is derived from the original cryptoassets already held by the individual” the paper said.
Income Tax – employment and mining:
HMRC stated that individuals will be liable to pay Income Tax and National Insurance Contributions on cryptoassets if they are received from their employer as a form of non-cash payment or received through mining, transaction confirmation or airdrops.
“If an employer has a UK tax presence they must deduct and account to HMRC for the Income Tax and Class 1 National Insurance contributions due through the operation of PAYE, based on the best estimate that can reasonably be made of the cryptoasset’s value”, the paper said.
Cryptocurrency mining can either amount to a trade or “miscellaneous income”.
In either case, the pound sterling value of any cryptoasset reward will be taxable as income.
Similarly, fees and rewards for confirming transactions and cryptoassets received through marketing or advertising campaigns – known as airdrops – are also chargeable to Income Tax.
If cryptoassets are held onto and disposed of at a later date after the value has increased, an individual may also have to pay Capital Gains Tax on any profit.
If an individual buys and sells cryptoassets with such “frequency, level of organisation and sophistication” that would amount to a financial trade, Income Tax will take priority over Capital Gains Tax.
Commenting on the report, Hogan Lovells Tax Partner Philip Harle said:
“HMRC makes clear that it will expect capital gains tax to be paid on investments in crypto. It does not see it as gambling, a possibility which was left open by Revenue and Customs Brief 9 in 2014.”
In addition to this paper, two pieces of further guidance were published by HMRC on whether an individual is required to pay tax when receiving and selling cryptoassets.
Further guidance for businesses and companies will follow.
If you want to take advantage of blockchain's huge potential and disruptive impact, while avoiding falling foul of ever-developing regulatory and legal requirements, visit our Hogan Lovells Engage Blockchain Toolkit.
Authored John Salmon and Philip Harle