Her Majesty’s Revenue and Customs (HMRC), is the UK’s government agency responsible for collecting taxes, and overseer of other forms of the nation’s coffers. In December 2018, the tax agency released a comprehensive report explaining how it views crypto assets and taxation on holdings.
The report’s focus is on how to tax the crypto assets you own. The agency will further publish information on the tax treatment of crypto asset transactions involving businesses and companies.
Which Taxes Apply?
The HMRC document is a continuation of previous reports which treat assets more like property rather than a form of currency. The agency doesn’t consider crypto assets to be currency or money. This is a reflection of the position set out by the report from the Cryptoasset Taskforce (CATF). The taskforce categorises cryptocurrencies as either utility tokens, exchange tokens or security tokens.
According to the report, how to treat a token for tax purposes depends on the token’s use case, rather than its definition. The report explains that you will be liable to pay Income Tax and National Insurance contributions on crypto assets you receive from:
- Your employer as a form of payment, transaction fee, from mining or airdrops
- If you invest in tokens hoping their value will increase
Additionally, there may be instances where you could be running a business, which is carrying on a financial trade in crypto assets that have taxable trading profits. Though uncommon, Income Tax would take priority over the Capital Gains Tax rules in such cases.
Securities or Not?
Note that the HMRC doesn’t consider crypto trading to be the same as gambling. Such assets are more of securities. To simplify tax calculations, you can combine different assets rather than calculating the gains and losses on each specific asset. Look at the total value placed in the pool and compare that with the value at the end of the tax period.
Forks and Losses
Hard forks occur when one blockchain splits another one for improvements. The document outlines how forks of a blockchain may affect taxation, especially hard forks which cause the chain to split forming new tokens. The document explains, “A new crypto asset can only be disposed of if the exchange recognises the new crypto asset. If the exchange doesn’t recognise it, the position of the blockchain will not change, to show individual owning units of the new crypto asset. HMRC will consider difficult cases as they arise.”
Other provisions account for assets which lost value, if tokens are defrauded from the investor, stolen, or if you lose your private keys. In regards to the latter, HMRC advises that you can now claim your crypto asset has a “negligible value” which could if approved allow you to claim a loss.
Crypto asset exchanges may only keep records of transactions for a short period. In some instances, the exchange may no longer be in operation when you complete a tax return. It’s your prerogative to keep separate records for each crypto asset transaction. This includes the type of crypto assets, transaction dates, number of units, bank statements, and the cumulative total of investment units held.
The HMRC document is precise and well-written. It’s also rejuvenating to see the British government shun the ‘Crypto bad’ mentality, popular in some quarters. Treating crypto assets as regular income or investments will make trading in them much easier as most taxpayers, and tax professionals will be more familiar with the processes.