Are you a UK resident that has invested, or is looking to invest, in cryptoassets? Pay close attention if you want to understand how you will be taxed, why this is important, and how to navigate this complex landscape, says Yvonne Steyn.
With Bitcoin advancing more than 300% in 2020, and 73% of HNW individuals expected to invest in cryptoassets before the end of 2022, understanding how your digital assets will be taxed is essential.
What's more, HMRC 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 - further evidence for why getting your cryptoasset taxes in order is crucial.
How do 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 do not consider cryptoassets to be currency or money, and have identified three types:
• Exchange tokens (like bitcoins)
• Utility tokens
• Security tokens
However, at this stage, HMRC's guidance only considers the taxation of exchange tokens in the UK.
How are they taxed?
1. CGT
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.
The FCA reports that 2.3 million of us have exposure to cryptos, a rise from 3.9% to 4.4% of adults between 2020 and 2021. If they have all been dutifully reporting their currency gains, come the end of January 2022, HMRC are set to see some sensational CGT receipts.
Now, if you are a crypto investor sitting on substantial gains, and thinking you are exempt because you haven't cashed in your holdings - you may need to start thinking about how you will fund a tax bill. If you've been trading crypto and realised gains along they way (even if only in a digital sense), then depending on those gains, you could still be facing a tax charge.
2. 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 math 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 do not consider the buying and selling of cryptoassets to be the same as gambling.
3. IHT and 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.
Ultimately, crypto investors - whether existing or new - are facing a complex tax landscape. If you're unsure how HMRC's requirements impact you, or need help submitting the correct information, it's vital to seek advice from a trusted adviser.
By Yvonne Steyn, Senior Associate, Maitland