Earlier this year HMRC published details of a report on the usage of cryptocurrency which showed the majority of people have little awareness of how these assets are taxed.
We would always recommend seeking investment advice because these investments can be risky, although HMRC do not view dealing in them as gambling, so any profits are taxable. We are merely giving a brief overview of how cryptoasset transactions are treated for tax purposes.
So what are cryptoassets?
A cryptoasset (or cryptocurrency) is a form of digital asset. There are many cryptocurrencies but perhaps the most well known is Bitcoin.
These have some similarities to regular currency in that they can sometimes be used as a payment method. However, as their value can increase and decrease, they are also similar in that sense to stock market investments.
There are a number of ways you might make money from cryptoassets and the tax treatment will depend on the circumstances.
What is the Tax treatment if I dispose of my crypoassets?
They can be bought with sterling or other regular currency and then later disposed of. Disposal does not just mean selling them. It could be trading them, giving them away, or using them to pay for something. Disposing of a crypotoasset is normally treated as the disposal of an investment subject to Capital Gains Tax. However, more unusually, trading regularly and methodically night be viewed as a trade, bringing profits into the charge of Income Tax and National Insurance. Further information can be found in HMRC’s manual.
What is the tax treatment if I make money from my cyptoassets?
Some types of cryptoassets give rewards to users for solving puzzles in a process called mining.
Some provide staking rewards. This has some similarity to interest payments as the user is rewarded for typing up their asset for a period of time. However, HMRC do not view this as interest.
The term airdrop means when someone receives a cryptoasset, either for free or in return for doing something. HMRC treat airdropped cryptoassets as taxable which are given in return for some sort of performance of a service.
HMRC generally treat these types of arrangements as either trading or miscellaneous income. If your combined trading and miscellaneous income is less than £1,000 in a tax year, then this will be covered by the trading allowance - if you are not already making use of it.
However, with staking sometimes it could mean ownership is transferred. If so, this will be treated as a disposal for capital gains tax purposes.
More detail is available in HMRC’s Cryptoassets Manual.
This is a complex and evolving area and this article is just a brief outline. You will need professional advice specific to your particular circumstances if you are dealing in cryptoassets. We are here to help.