HMRC has recently been clamping down on crypto exchanges to share information about their customers.
Cryptoassets, also known as cryptocurrency, are cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically. Currently, HMRC do not consider cryptoassets to be currency or money, and have identified three types:
• Exchange tokens (like bitcoins)
• Utility tokens
• Security tokens
Now HMRC’s guidance only considers the taxation of exchange tokens in the UK.
How are they taxed?
1.Capital gains tax (CGT)
Usually, individuals hold cryptoassets as a personal investment, which means that they will be liable to pay CGT when they dispose of their cryptoassets.
2.Income Tax and National Insurance
Liabilities to pay income tax (as opposed to CGT) and National Insurance contributions on cryptoassets received:
– from an employer as a form of non-cash payment;
– for ‘mining’, which in this context means verifying additions to the blockchain digital ledger (mining will typically involve using computers to solve difficult math problems in order to generate new cryptoassets);
– from ‘airdrops’. This is by receiving an allocation of tokens or other cryptoassets, for example, as part of a marketing or advertising campaign.
A business by carrying on a financial trade in cryptoassets, the taxable trading profits generated by the business will be subject to income tax.
HMRC do not consider the buying and selling of cryptoassets to be the same as gambling.
3.Inheritance tax (IHT) and remittance basis
Cryptoassets held by UK residents are seen as being located in the UK. The concept of ‘domicile’ is therefore irrelevant when it comes to cryptoassets.
This means that a UK resident’s cryptoassets will fall in their estate for IHT purposes.
This also means that the remittance basis would not apply to cryptoassets. For instance, if you are a UK resident and trade in Bitcoin, you will be subject to UK tax on all profits generated, regardless of whether you are a remittance basis user.
Ultimately, crypto investors – whether existing or new – are facing a complex tax landscape.