A Complete Guide To Cryptocurrency Tax in the UK

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Over recent years, cryptocurrency assets have become increasingly prevalent in the world of tax and have attracted the interest of investors and industry regulators alike, but what exactly are they?

This guide, which is brought to you by the cryptocurrency tax advisors at Alexander & Co, a chartered accountants firm, give you a run-through of how cryptocurrency is categorically defined in the UK and who is liable to pay tax on these types of assets.

What are cryptocurrency assets?

Cryptocurrency (or cryptoassets) are digital currencies that can be transferred, stored or traded electronically. Due to their technologically advanced nature, which is secured by cryptography, it is nearly impossible to counterfeit or double-spend on cryptocurrencies. As well as this, the emergence of new technologies has enabled cryptoassets to be created in various forms.

With this all in mind, there is no wonder why cryptoassets have been under the watchful radar of HMRC during these past few years. The actual tax treatment of these assets is continuing to be developed and this is simply due to the ever-evolving nature of the technologies underpinning them. However, when dealing with cryptocurrency cases, HMRC will still consider the facts of each case to apply the most appropriate tax provisions.

The three types of cryptocurrency assets

It is important to note that HMRC does not categorise cryptoassets (whether they be Ethereum, Ripple or Bitcoin) to be money or currency. Rather, the department has grouped cryptoassets into three distinct categories:

  • Exchange tokens – Exchange tokens are also known as general cryptocurrencies (like Bitcoin) and the value of these is solely based on their exchange or investment uses. Unlike utility or security tokens, exchange tokens do not provide a right of access to services or goods.
  • Utility tokens – With utility tokens, the holder can gain access to goods and services on a platform usually using DLT. These tokens are provided by businesses who have accepted the tokens as payment for the goods and services in the operation.
  • Security tokens – Security tokens are issued to a holder to fulfil the particular interests of a business. These may be given under matters relating to ownership rights, money repayment, or entitlement to a share of business profits.

As mentioned, HMRC deals with cryptocurrency matters on a case-by-case basis. After all, when it comes to assessing, there can be variation in the terminology used; as well as with the type of coins, tokens and transactions. That being said, the tax treatment for tokens is dependent on the scenario at hand and is not predicated upon the definition of the token.

What are the regulations for paying tax on cryptoassets?

You may now be wondering who is liable to pay tax on cryptoassets. The short answer is anyone who lives in the UK who has cryptoassets may be liable for tax. According to current regulations, you are deemed liable to pay tax when cryptoassets are traded, mined, received as payment, received as airdrop in lieu of a service (or expected service), or exchanged for any type of cryptoasset.

Now, let’s finally look at the different taxes you may be liable to pay when trading, disposing, or exchanging any cryptoassets:

  • Income Tax – HMRC taxes cryptoassets on the basis of what the person who holds it does. For example, if the holder is a trader, then Income Tax will be applied to their trading profits. Furthermore, if the activity is considered to be professional trading, Income Tax will take priority over Capital Gains Tax and will apply to general profits and losses. Income Tax and National Insurance contributions are also payable in situations where cryptoassets have been received through Airdrops in return of a service (or expected service) or through mining.
  • Capital Gains Tax – Whether you have traded, disposed of or exchanged any cryptoassets, you are likely to be required to pay Capital Gains Tax (CGT). You may also be liable to pay CGT when you use your cryptocurrency to provide payment for services or goods. For those who are classified as a higher or additional rate taxpayer, cryptoassets will be taxed at the Capital Gains rate of 20%. Basic rate taxpayers will, however, be taxed differently, and the rate to be charged is dependent on one’s taxable income.
  • Inheritance Tax – When dealing with cryptoassets, it is also important to note that Inheritance Tax may also be due upon death. That being said, Inheritance Tax Planning should be considered.

In summary, cryptoassets are a prime example of how much the world of tax has evolved over the years and how new technologies are continuing to influence day-to-day industry operations. As a trader, investor or industry regulator, it is therefore essential for you to be aware of what cryptoassets are and the implications of their use.

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