The author of this article takes a brief look at the ways the UK tax agency will treat movements in the value of cryptoassets such as bitcoin and what investors should do.
The intense interest among some speculators and firms in bitcoin and other “digital assets” is certainly one of the most colourful themes in today’s financial world. Bitcoin has been on a roller-coaster - surging from around $9,200 per coin in October of 2020 to $63,000 in April this year before sliding down to its current level of around $34,000. The area is getting more “mainstream,” attracting large wealth and banking institutions such as JP Morgan, Morgan Stanley, Goldman Sachs and Julius Baer. Even the Basel-based Bank for International Settlements, which sets standards for the world’s major banks, such as capital risk, has weighed in on the subject.
On a slightly more prosaic note, there is tax to consider. Those lucky or smart enough to see the value of their digital assets go up will have a capital gain. And given the risk that capital gains taxes are on the rise in certain countries, what is the right approach to take for tax and cryptos?
To discuss all this is Yvonne Steyn, senior associate specialising in tax planning for ultra-high net worth individuals at Maitland Group. The editors are pleased to share these views and invite responses. The usual editorial disclaimers apply. To comment, email firstname.lastname@example.org and email@example.com
With bitcoin advancing by more than 300 per cent in 2020, and 73 per cent of HNW individuals expected to invest in cryptoassets before the end of 2022, understanding how your digital assets will be taxed, why this is important, and how to navigate this complex landscape is essential.
What’s more, HM Revenue & Customs has recently been clamping down on crypto exchanges to share information about their customers. This means that investors found to be evading tax bills may incur severe penalties.
With any crypto transaction locking in a gain (even only in a digital sense) subject to capital gains tax, many HNW crypto investors - either old or new - can expect to receive a tax bill. However, depending on how these crypto assets were received, they can also be subject to income tax, inheritance tax or NI contributions, too - something many are unaware of.
Ultimately, if HNW investors are unsure how HMRC’s requirements impact their cryptoasset holdings, or need help submitting the correct information to the regulator, it’s vital that they seek advice from a trusted advisor.
How does HMRC define cryptoassets?
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 does not consider cryptoassets to be currency or money, and have identified three types:
Exchange tokens (like bitcoins);
Utility tokens; and
However, at this stage, HMRC’s guidance only considers the taxation of exchange tokens in the UK.
How are they taxed?
Capital gains tax
Usually, individuals hold cryptoassets as a personal investment, which means that they will be liable to pay capital gains tax (CGT) when they dispose of their cryptoassets.
Inheritance tax and the 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 inheritance tax 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.
Income tax and National Insurance
You will be liable to pay income tax (as opposed to CGT) and National Insurance contributions on cryptoassets received: from your 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 maths' problems in order to generate new cryptoassets); or from “airdrops.” This is where you receive an allocation of tokens or other cryptoassets, for example, as part of a marketing or advertising campaign.
If you run a business by carrying on a financial trade in cryptoassets, the “taxable trading profits” generated by the business will be subject to income tax. Note, HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.