Dispelling the myths: what you need to know about cryptoassets and tax

Rachel Layton-Henry of Knill James Tax Department sheds light on the complex world of Bitcoin and other cryptoassets and explains how they are treated by HMRC.

You might be able to pay for your Virgin Galactic Space Flight, your new Tesla or your morning coffee with Bitcoin nowadays, but did you realise that these transactions may land you with an unexpected tax bill - or worse, an HMRC enquiry?

As cryptoassets grow in popularity and awareness around them also increases, it's important to understand exactly what they are, as well as the tax implications of buying, selling and investing in these types of assets.

What are cryptoassets?

In simple terms, they are digital assets which are similar to stocks and shares in that you can buy and sell them at varying prices on an exchange. However, instead of the exchange being located in London, New York or Tokyo, it can be accessed online without a middleman, anywhere and at any time. Cryptoassets are designed to be used over the internet, meaning they can be transferred globally, almost instantly, and for very low fees.

What is the blockchain?

All transactions are “decentralised”, meaning they are not through one central facility like a bank; instead the transactions and movements are recorded and maintained on the blockchain. At its most basic, the blockchain is similar to a bank's balance sheet or ledger: it is a list of transactions that anyone can view and verify. It is thought to be safer and more secure than traditional payment methods as it is constantly being scrutinised by the users.

What are the different types of cryptoassets?

HMRC have classified these digital assets into four main categories:

Exchange tokens: these are intended to be used as a means of payment, e.g. Bitcoin

Utility tokens: usually with a business behind them, these tokens are exchanged for particular goods or services that the issuer offers, similar to a gift card or a casino chip.

Security/Equity tokens: these provide the holder with particular rights or interests in an asset that already has value, e.g. rental properties, loans, corporate stock, etc.

Stablecoin: these tokens are designed to be less volatile and are usually pegged to something considered to have a stable value, such as gold.

How does HMRC treat cryptoassets?

The (not so) simple answer is… it depends!

The tax treatment of all types of coins/tokens is dependent on their nature and the use of the token. However, in most individual cases, HMRC regard crypto transactions as investments held for capital growth, and as such they fall within the scope of Capital Gains Tax (CGT). HMRC do not view transactions regarding cryptoassets as gambling, and therefore they are not free from tax.

Disposals of cryptoassets

If you dispose of your crypto by way of selling for cash, selling for another token, payment for goods or services, or even gifting to someone else, HMRC have made it clear that this is a chargeable transaction and you are deemed to have received the GBP equivalent.

This means that it's important that you think of crypto in the same way as any other asset. For example, if you were to sell a two bedroom flat and buy a three bedroom house, there is a disposal of one property and a purchase of another. Again, if you swap some National Grid plc shares to buy some Apple Inc. stock, you are disposing of one asset to purchase another.

What are the CGT reporting requirements?

If you have disposed of assets during the tax year and have received proceeds of over £49,200 or overall gains of over £12,300, your transactions should be reported on a self-assessment tax return.

What do HMRC need to know?

As a first step, you should ensure that your recordkeeping is up to speed. HMRC will expect to see the following:

Type of crypto asset
Date and time of the transaction
Number of units purchased and sold, and the GBP value at that time
Cumulative totals of investment units held
Bank statements and wallet addresses

Disclosure of information – the details are out there!

HMRC receives information directly from UK crypto exchanges/platforms and so not disclosing transactions will most likely result in an enquiry and could lead to HMRC imposing penalties and costing you more.

Last year a popular exchange called Coinbase confirmed that it had shared with HMRC details of UK resident users with transactions of £5,000 or more in the 2019/20 tax year.

Global action to tackle tax avoidance

HMRC has allocated a lot of resources to ensuring the tax due on cryptocurrency transactions is declared through collaboration with their international partners.

The J5 (Joint Chiefs of Global Tax Enforcement comprising Australia, Canada, the Netherlands, USA and the UK) are also already sharing information on the use of cryptoassets and foresee more information being shared globally in the coming years in a co-ordinated effort to tackle tax crimes.

Here to help

We expect to see an increasing number of HMRC enquiries focusing on those who buy and sell cryptoassets. Whatever your involvement with cryptoassets, there can be implications for tax. If you need any further advice or would like to discuss how you might be affected, call us on 01273 480480 and we'd be pleased to help.

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