Cryptocurrencies are digital currencies which uses digital ledger technology, which due to its strong cryptography, ensures that transactions involving cryptocurrencies are secure. While the original cryptocurrency was Bitcoin in 2009, several other cryptocurrencies have been created since, including Ethereum, Ripple and Litecoin.
In the past few years, these crypto assets have grown in value and popularity as an investment option. For example, Tesla billionaire Elon Musk famously invested $1.5 billion in Bitcoin and was credited with raiding Bitcoin prices, as well as the prices of other cryptocurrencies, via Twitter.
How Cryptocurrency is Taxed in the UK
While the level of investment in cryptocurrencies and the value of the cryptocurrency market increases, there is still no consistent approach to the taxation of crypto assets proposed by global regulators. There are some who equate earnings from cryptocurrencies to gambling and lottery winnings and should therefore be treated the same when it comes to tax, however this is not correct.
According to the HRMC, cryptocurrencies should not be treated as conventional currencies, instead stating that ‘A trade in crypto asset exchange tokens would be similar in nature to a trade in shares, securities, or other financial products’ with case law, meaning that the share trading should act as a standard when it comes to taxing crypto assets.
In the UK, crypto asset gains (for Capital Gains Tax) are measured when the crypto assets are sold, or when one cryptocurrency is traded for another (e.g. trading Bitcoin for Ethereum) so if there is no disposal then no Capital Gains Tax is accounted for. Guidance notes provided by HRMC state that the tax applied depends upon whether trade is being carried on. the criteria for whether the buying or selling of these assets counts as trade is dependent on the frequency, level and type of organisation, as well as the intentions behind the exchange.
If these criteria are met, and therefore the exchange/s is considered a trade, the receipts and expenses become part of the calculated trading profit of the company. As a result, the profits received from these trades will also be subject to Income Tax.
For Individuals
For individuals who are not trading then there is a Capital Gains Tax allowance of £6,000 which is tax-free, in the 2023-24 tax year, and will be further reduced to £3,000 in the 2024-25 tax year. Additional gains will be taxed at a rate of either 10% or 20%, depending upon the level of the individual’s other source/s of income.
For Businesses
If a business trades in crypto assets, any valuation increase will be considered as trading profits, therefore being subject to Corporation Tax.
Because cryptocurrency isn’t treated like regular currency, businesses will trade crypto assets while treating them as ‘intangible assets’ which will be taxed under Corporation Tax rules for intangible fixed assets if the token is an ‘intangible asset’ for accounting purposes and an ‘intangible fixed asset’ which means the asset has been created or bought by a company for use on a continuing basis. This definition is not applicable if the tokens are held by the company.
Not all gains and losses on the disposal of crypto assets are allowed to be calculated as a deduction, decided according to Section 38 of the Taxation of Chargeable Gains Act 1992. In the eyes of HRMC, deductible costs include:
- The price originally paid for the asset
- The cost of the transaction to have it included on the distributed ledger
- The cost of advertising for a vendor or purchaser
- The costs to have a contract created to allow for the acquisition or disposal of the asset
- The cost of valuation of the asset to calculate gains and losses made
These deductions will be made against the company’s profits for Income Tax and won’t be able to be deducted from Capital Gains Tax. Furthermore, VAT will also be included because of the sale of goods and services in exchange for cryptoasset exchange tokens.
