Taxation of Crypto Assets For Individuals
Crypto currency or crypto is a digital asset designed to work as a medium of exchange.
There has been a surge in buying and holding different types cryptoassets (such as Bitcoin) as a personal investment, usually for capital appreciation in its value or to make purchases.
Cryptoassets are not considered as a currency or money by key the financial institutions of world. There are bright chances as Rishi Sunak suggested that UK might be the first country to link crytoassets to their currency.
The governments and taxation bodies around the world including HMRC are now actively looking forward to design taxation systems for cryptoassets. As per HMRC’s current suggested guidelines cryptoassets are treated similarly as shares.
The situation becomes interesting for those who are not UK tax resident; they are NOT generally exposed to UK tax. However, there are anti-avoidance rules in place for those who leave UK and come back to UK within 5 years.
There two taxation treatments available for dealing with cryptos:
- Capital Gains Tax
- Income Tax
Capital Gains Tax
For most of the taxpayers buying, holding and selling cryptocurrency will be deemed to carry on an investment activity and be subject to capital gains tax.
They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
- selling tokens
- exchanging tokens for a different type of cryptoasset
- using tokens to pay for goods or services
- giving away tokens to another person (unless it is a gift to your spouse or civil partner)
The taxpayers who deal with cryptos (buying and selling, or receiving) as a business / trade will be deemed as carrying on trade of cryptos and will be subject to Income Tax. HMRC uses the concept of badges of trade when considering the profit motive.
It is worth mentioning here the rates of Income tax are higher than Capital gains tax.
Most of the holders of cryptos would be the ‘day-trader’ who is actively buying and selling cryptoassets with the view to realising a short-term profit.
Even in these circumstances, it is generally difficult to fall within the description of a ‘trader’ and HMRC generally accept that individuals will be subject to the more favourable rates of capital gains tax. If the taxpayer’s activity is trading, then Income Tax will take priority over CGT and will apply to profits (or losses).
HMRC has published further information for businesses and companies about the tax treatment of cryptoasset transactions.
Individuals will be liable to pay Income Tax and National Insurance Contributions on cryptoassets which they receive from:
- their employer as a form of non-cash payment
- mining, transaction confirmation or airdrops
There may also be cases where an individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits.
If you need any further information, feel free to contact us.