Taxation of Crypto Trading in the UK
Legal Nodes Team
Tax treatment of cryptocurrencies still remains one of the most difficult questions. Legal Nodes, therefore, decided to write a series of articles, in which our financial advisor Vlad will help us to shed some light on tax treatment of cryptocurrencies.
We are starting with the United Kingdom – one of the first countries to issue guidance about taxation of crypto transactions. Just to note, in the United Kingdom, cryptocurrencies are referred to as “cryptoassets” in the official documents, so be prepared to see both words used interchangeably.
Let us begin with the recap of what UK tax authority - Her Majesty’s Revenue and Customs (HMRC), thinks about the status of cryptocurrencies and areas covered to date.
“Cryptocurrencies” are considered to be assets for the purposes of tax, i.e. representations of value or contractual rights. Such cryptoassets are not currency or money.
HMRC, together with FCA and Bank of England, have previously identified three types of cryptoassets:
- Exchange tokens
- Utility tokens
- Security tokens
The latest Guidance named “Cryptoassets for individuals” issued by HRMC at the end of 2018 focuses on exchange tokens, which encompasses cryptocurrencies like Bitcoin, making them the most relevant for crypto traders.
Other types of tokens are not yet covered by HRMC; however, it is important to remember that HRMC adopts “substance over form” approach. This means that tax treatment of cryptoassets will depend on their nature and use, and not the “tag” given to a particular cryptoassets. This makes approaches identified below just as relevant for other types of cryptoassets.
Another peculiar point is that HRMC has only clarified tax treatment of cryptocurrencies for individuals. To date there is still no official report with regards to businesses – neither sole traders nor companies or partnerships.
So, let’s have a closer look on how individuals are taxed on their crypto trades.
There are two main taxes which apply to individuals - Capital Gains Tax and Income Tax. Usually, an individual will pay only one of the two in relation to his or her cryptoassets holding.
If the crypto holder is conducting a “trade”, then Income Tax will be applied to their trading profits. Trading is, however, defined as a “sophisticated” activity undertaken with high frequency and level of organization. HMRC advises to use the existing case law to establish whether there has been a “trade”.
It would, therefore, be “exceptional circumstances” when trading activity will amount to a financial trade triggering Income Tax to take priority over Capital Gains Tax considered below.
The rate for individuals can be from 0% all the way up to 45%.
Capital Gains Tax
The normal situation concerning an individual buying and selling cryptoassets would be considered an investment activity, as opposed to a trade, and hence will trigger Capital Gains Tax liability.
Capital Gains Tax liability arises where there is a “chargeable asset”, meaning it can be owned and has a value that can be realized – this must be true for cryptoassets as well.
To calculate Capital Gains Tax, individuals should calculate gain or loss on disposal of cryptoassets. A “disposal” includes selling cryptoassets for fiat money, using cryptoassets to pay for goods or services, exchanging cryptoassets for a different type of cryptoasset, and giving away cryptoassets to another person.
The rate for individuals ranges between 18% to 28%.
Overall, crypto industry is definitely experiencing more attention from the tax authorities, and we should be prepared to receive more clarifications in 2019.
We welcome your comments, so please do share your thoughts on this subject with us.
In the next article on crypto taxation, we will tell you about tax treatment of mining activities.
Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice.
Vlad Lavrishchev, Financial Advisor at Legal Nodes