Cryptocurrency is fast becoming an investment staple, but what are the tax considerations of crypto?  What is it that we all need to know about how crypto is taxed?

 

What are crypto assets / cryptocurrencies?

In short, crypto assets are a type of electronic cash that is not managed by a central bank or government.  Examples include Bitcoin, Litecoin and Ethereum, which are all a type of crypto asset known as an ‘exchange token’ (see glossary).

 

A brief history of Crypto assets / Cryptocurrencies

Crypto assets may still feel new, but they date back to 1983 when “eCash” was launched to allow people to transfer money anonymously over the internet.  This never really took off, and it wasn’t until the aftermath of the 2008 financial crisis that crypto assets made any traction.  First to market was Bitcoin, which was launched on 3 January 2009. At this time the value of 1 Bitcoin was less than US$1. Fast forward to now, and 1 Bitcoin is worth over US$100,000, but it has not been a smooth ride to get there.

Over the years more and more crypto assets have been launched, and there are currently over 17,000 in existence. With this many to choose from and the rapid rise in value of Bitcoin and other market leading cryptocurrencies, it is no surprise that crypto assets are becoming a more common as part of people’s investment portfolios.

 

How are Crypto acquired and traded?

People ordinarily acquire and trade crypto assets via a crypto asset exchange, such as Coinbase, Binance, Kraken and Gemini.  Crypto assets can be acquired using cash or by exchanging other such assets or traded via peer-to-peer transactions. They can also be acquired by ‘mining’, which we will not cover here.

 

What are the tax considerations of crypto?  Crypto, tax and the background

The first and possibly most important point to appreciate is that HMRC do not regard crypto assets as currency or money and instead view them in the same manner as stocks and shares. HMRC’s view is that in most cases, individuals hold crypto assets as a personal investment for capital appreciation and therefore gains or losses will be subject to capital gains tax, rather than income tax.

However, there may be cases where an individual is running a business which is carrying on a financial trade in crypto assets which could give rise to taxable trading profits subject to income tax.

 

Tax considerations of crypto, what are the tax liabilities on disposal?

Crypto assets will be within the charge to capital gains tax on disposal unless acquired as part of a trading activity.  A disposal may include:

• selling crypto assets for money
• using crypto assets to pay for goods and services
• exchanging crypto assets for a different type of crypto asset
• giving away crypto assets

The gain (or loss) on disposal is calculated in the same way as for other assets, such as stocks and shares.

 

The basic principle is:

Proceeds, less: Costs of sales, less: Base cost (purchase price and costs of acquisition) = Gain (or Loss) on disposal

 

Determining the proceeds

In the case of a sale of crypto assets the sale proceeds (cash received) will be treated as the disposal consideration (unless the sale is between connected persons or on non-arm’s length terms).

If crypto assets are used to pay for goods or services, there will also be a disposal, and the proceeds will be treated as the value of the goods or services received in exchange. If these cannot be valued, the market value of the crypto assets will be brought into account as consideration.

Many types of crypto asset are purchased using a different type of crypto asset (‘crypto-to-crypto exchanges’) – for example, using Bitcoin to acquire Ethereum. In this scenario, there will be both a disposal (in the example above, of Bitcoin) and an acquisition (of Ethereum). The proceeds will be the value of the consideration (Ethereum) given for the disposal (of Bitcoin). Where the transaction takes place via a crypto asset exchange, the prices quoted by that exchange on that day should be used.

Notably, the rules that apply to exchanges of shares and securities (where the old shares are not treated as disposed of and the new shares acquired take over the base cost of the old shares) are not applicable to crypto assets.

A gift of a crypto asset is also the occasion of a disposal and (unless the gift is between spouses or civil partners), a gain will be computed, using the market value of the crypto asset gifted.

 

Deductions for costs of sale / acquisition

For capital gains tax purposes, deductions are allowed for both the incidental costs of disposal and acquisition of an asset. In the case of crypto assets traded on a crypto asset exchange, the most likely cost to be incurred is the transaction costs charged by the exchange, not all of which would be allowable.

 

Determining the ‘base cost’

Where, as will generally be the case, crypto assets are dealt in without identifying the particular tokens being disposed of or acquired, then the tokens should be pooled with other tokens of the same ‘class’, as for shares and securities.

For example, if an individual buys Bitcoin via an exchange, then he will be treated as having a single pooled asset that increases or decreases with each further acquisition or disposal of Bitcoin.

The base cost (per unit) will therefore be the blended average cost of all purchases of a particular crypto asset.  There are exceptions to this general rule of a ‘pool’, namely the ‘same day rule’ and the ’30-day rule’.

Where tokens of the same type are acquired and disposed of by the same individual on the same day and in the same capacity, all the tokens acquired are treated as acquired in the same transaction and all those disposed of are treated as disposed of in the same transaction. So far as possible, a disposal is matched with an acquisition on the same day. If there are unmatched tokens, the 30-day rule may apply.

If an individual disposes of tokens and then acquires, in the same capacity, tokens of the same type within the next 30 days, the same day rule is first applied (if applicable) and any tokens acquired that are not matched under that rule together with any further tokens acquired within the 30-day period (FIFO basis) are matched with the disposal. If there are further disposals in the 30-day period, earlier disposals are matched before later ones.

Any acquired tokens that are still unmatched are then pooled, either with tokens of the same description already held or by creation of a new pool.

 

Tax considerations of crypto – compliance

There are many tax considerations of crypto, and HMRC’s view is that individuals must keep their own records for each crypto asset. Such records must include details of:

• the type of crypto asset;
• date of the transaction;
• if bought or sold;
• number of units transacted;
• value as at the date of the transaction in sterling;
• cumulative total of investment units held; and
• bank statements and wallet addresses in case these are needed for an enquiry or review.

It was announced at Spring Budget 2023 that capital gains arising from crypto assets will need to be separately identified on the self-assessment return for 2024–25 onwards.

 

Other tax considerations of Crypto

 

Inheritance Tax (IHT)

Crypto assets are regarded by HMRC as property for inheritance tax purposes and are therefore within the scope of charge.

 

Stamp Taxes

In order for transfers of crypto assets to fall within the scope of stamp duty or stamp duty reserve tax, they would need to fall within the definition of ‘stock or marketable securities’ or ‘chargeable securities’. HMRC’s current view is that they do not.

 

VAT

For crypto asset transactions conducted otherwise than in the course of a business, there should be no VAT implications.

 

The tax considerations of crypto – how can RPGCC help?

If you are keen to explore the tax considerations of crypto our team are well versed in the tax treatment of crypto assets and we are ready and waiting to help.

If you hold, or have held, crypto assets we can help you to understand your tax position, advise on tax optimisation and ensure that transactions are correctly reported to HMRC.  We can also assist you in using software packages, such as Koinly, to keep track of your Crypto transactions and simplify the preparation of your tax returns.

If you have any questions about the tax consideration of crypto assets or wish to review your individual tax position, please contact us today or telephone us on 020 7870 9050.