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Taxing crypto: When is a currency not a currency?

Posted on 14 January 2022

The basic premise of HMRC's approach is that cryptoassets are neither currency nor money. This view is set out in HMRC's Cryptoassets Manual, and reflects what had been previously set out in the Cryptoasset Taskforce: final report (October 2018), which described cryptoassets were "too volatile to be a good store of value…not widely accepted as means of exchange, and … not used as a unit of account."

However things have moved on since 2018. Currently the overall value of the crypto market is getting close to $3 trillion, and the growing popularity of digital assets like non-fungible  tokens (NFTs) is bringing the once niche technology into the mainstream.

HMRC's view means that transfers of cryptoassets are not exempt from capital gains tax (CGT) in the same way that currency can be. 

The reasoning for HMRC's view that cryptocurrency should not be regarded as actual currency is perhaps clear.  If cryptocurrency was classified as currency, most disposals would not be chargeable to UK tax.  HMRC's view is that the vast majority of disposals of cryptocurrencies are subject to CGT rather than income tax.  There are a few limited exceptions to this rule, for example, where someone is involved in mining or staking, but otherwise HMRC believes that only in "exceptional circumstances" would a person's investment in cryptoassets amount to a financial trade.

HMRC have been alive to the issues raised by the increased popularity of cryptocurrencies for some time, and have now started to pursue those they think are non-compliant, either deliberately or through ignorance of the rules.  In recent months, HMRC have actively targeted taxpayers with so-called "nudge letters" to reinforce their views on the taxation of cryptoassets.

Those letters set out in particular that cryptoasset investors may have to pay CGT on any disposals, and indicate that in HMRC's view a disposal is made whenever:

  • Cryptoassets are sold for currency (e.g. USD, GBP) even if the sale monies are not "withdrawn" from the cryptoasset exchange;
  • A cryptoasset is exchanged for another, for example Bitcoin to Ether.  HMRC's view is that CGT must be paid on any gains, even if there is no conversion of crypto assets back to currency; and
  • Cryptoassets are used to buy goods or services.

Whilst the crypto world is fast moving, HMRC are trying their best to keep up, and those investing should understand HMRC's views on how these assets are taxed in advance. 

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