This week HMRC has published detailed guidance on the tax treatment of cryptoassets (including cryptocurrencies) held by individuals.
HMRC last published guidance on Bitcoin and other cryptocurrencies back in 2014. That guidance only gave a high-level steer on how Bitcoin and other cryptocurrencies may be treated for UK tax purposes. The new guidance published on 19 December 2019 sets out more detail on HMRC's view of how activities relating to cryptoassets (including cryptocurrencies) will be taxed.
As anticipated, HMRC do not consider cryptocurrencies to be money or currency, but view them as assets which may be invested in or traded. The approach set out in the new guidance is similar to the approach taken to the taxation of shares or securities bought and sold by individuals. In particular, the guidance states that HMRC expect that transactions in cryptocurrencies entered into by an individual will normally amount to investment activity and be subject to capital gains tax (CGT), as opposed to a trading activity which would be subject to income tax. In order to calculate any CGT liability, individuals who are investing in cryptocurrencies will need to apply special "pooling" rules (which also apply to investments in shares). Broadly, this means creating a "pool" for each cryptocurrency and calculating gains or losses on the basis that any disposal is a disposal of part of the pool. Practical examples are set out in the guidance.
The guidance makes it clear that there are circumstances in which individuals may be buying and selling cryptoassets 'with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself'. The line between trading and investment is a delicate one and individuals frequently buying and selling cryptoassets may need to seek advice to determine on which side of the line they fall. Where individuals are trading, they will be subject to income tax (at rates of up to 45%) on any taxable profits. The new guidance also confirms that individuals receiving cryptoassets in connection with their employment may be subject to income tax and national insurance contributions, with employers having a liability to operate PAYE based on a best estimate of the value of the cryptoassets in question.
Although HMRC previously suggested that some cryptocurrency transactions may be exempt from tax as gambling profits, the new guidance makes it clear that HMRC do not consider buying and selling cryptoassets to be gambling and therefore such transactions will be taxable.
The clarity offered by the guidance is welcomed, although some taxpayers may still be left confused as to whether they are investing or trading in cryptocurrencies. The timing of the guidance also leaves taxpayers with little time to review their cryptocurrency profits ahead of the 31 January 2019 deadline for filing self-assessment tax returns for the 2017/18 tax year. Further guidance is still needed for companies and is expected to follow in 2019.
Please contact any member of our tax team if you have any queries.