As the varieties and popularity of cryptoassets is constantly increasing, it is worth looking at how HMRC addresses their tax treatment. Although there is currently no tax legislation for them, HMRC earlier this year published their guidance manual to explain their view.
The assets are in the form of digital tokens, some having the ability to be exchanged for goods and services and others granting certain rights to their holders. The assets are held in digital wallets which are secured by a digital key known only to the user. The creation and processing of transactions are recorded in a blockchain on a public ledger which operates on a peer-to-peer network. This blockchain is secured by cryptography and each transaction made is recorded and incorporated into the next block added to the chain.
HMRC advise that the buying and selling of the tokens gives rise to a potential liability under Capital Gains Tax (CGT). Individuals may also be liable for income tax when cryptocurrency is received via data mining activities and if it is received as salary from an employment. Individuals running a business making profits from trading cryptocurrency may also be charged income tax on those profits.
For CGT purposes, HMRC have defined a “disposal” of cryptoassets as not only including selling cryptoassets for actual currency, but also exchanging cryptoassets for a different type of cryptoasset. When working out the gain, as per the standard CGT rules, expenses directly relating to the purchase or disposal can be offset. In cryptoasset terms this would mean any fees or commission incurred on the transactions.
Any gain remaining (after losses are deducted) that is over the CGT allowance (£12,300 in 2021/22) is subject to tax at 10% (basic rate) or 20% (higher rate).
It is therefore essential that individuals keep records in respect of each cryptoasset transaction in order to make calculations on the ongoing gains or losses.