The subject of much interest at the moment, cryptocurrency is rarely out of the news. Elon Musk’s recent tweet revealing that Tesla would no longer accept bitcoin over environmental concerns along with China’s vice-premier Liu He’s confirmation that the Chinese government is determined to crackdown on digital currency mining and trading has resulted in a sharp downturn in the value of cryptocurrency.
Despite its dramatic fluctuations, cryptocurrency is regarded as a good long-term investment and a few speculative internet searches will inevitably result in swathes of adverts enticing investors with low fees and the potential to make a lot of money. However, if you are looking to make a substantial investment, it’s essential you know what you are getting into. Our partner, Lisa Spearman, looks at the taxation of crypto as this can sometimes be overlooked or misunderstood.
Capital Gains Tax or Income Tax?
Whether you are an individual or corporate investor, it is important to be aware that the UK does not regard crypto assets as a currency, but rather, an investment asset. HMRC will assess whether the owner is trading or investing by looking at the volume of transactions; the existence of some sort of business infrastructure and the extent to which the asset is held in the long term; or if there is a frequent turn over.
Lisa says, “In previous times we have had to answer this question about stocks and shares day traders. A difference here is that HMRC accepts that crypto does not fit easily into these guidelines and acknowledges that it will be a rare case where an individual acting on his own account is trading, so in most cases, for individuals, Capital Gains Tax will apply.”
How can you record and report for tax purposes?
A key difficulty with crypto is record keeping. As crypto is regarded as a chargeable investment asset, there is a potential CGT charge (currently at a rate of 20%) whenever there is a disposal of coin – a sale, using the coin for a purchase, a gift and specifically, a movement from one type of coin to another. At any point of disposal, it is necessary to value the coin in sterling and compare that sterling value to the acquisition cost to establish the gain.
A report must be made on an annual tax return to HMRC if the gain is more than £12,500 or proceeds are more than £50,000. The assets in a given class are fungible and as such the base cost of bitcoin, for example, is calculated on a pooled basis and the appropriate portion used against the sale proceeds.
A traditional excel spreadsheet computation is virtually impossible and prohibitively expensive. The alternative is to not claim any deduction for costs and whether that is viable depends on the nature and cost of the acquisitions. There are app providers, such as Accointing, who aim to do the record keeping in a UK acceptable manner but importing the history may present its own challenges.
If one sells an asset at a loss, that loss can be carried forward indefinitely and claimed against future gains, but it is important to be aware that HMRC has indicated that it will not regard the loss of a key or wallet for example as a claimable loss as their argument is that the asset still exists.
HMRC manual on cryptocurrency
HMRC has taken some time to get its thinking in order but recently has published an operating manual and guidance as to how taxation matters should be handled. This is readily accessible on their website. HMRC has also stated that it considers crypto assets to be a high-risk area for tax evasion and money laundering offences. It is an indication of their concern that they have withheld publication of much of the investigation parts of their manual. We can expect that entries on tax returns relating to crypto will be checked and record keeping will be a key focus. This is very much contrary to the ethos of crypto investors but represents the clash of cultures between the virtual world and elderly tax legislation.
HMRC is also particularly alert for any remuneration or payment in the form of crypto assets and will be seeking to levy income tax and social security contributions on the recipient and probably on the paying employer as well.
How does taxation of virtual assets affect non-permanent UK residents?
It is clear from their manual that HMRC has wrestled with the issues of taxation of cryptocurrencies for short-term UK residents (non doms). Ordinarily the ‘remittance basis’ is applied to non doms so that they are taxed only on UK assets and non-UK monies to the extent they are brought here. Lisa says, “This requires us to determine the location of assets for UK tax purposes. With regards to cryptocurrencies, HMRC says a virtual asset is resident where the beneficial owner is resident. This means that the remittance basis cannot apply to crypto assets and any gains realised anywhere in the world by a UK resident person are taxable here.”
The only exception to this is where the coin can be regarded as a digital representation of an underlying asset, for example, debt; in this case the location of the coin is the location of the underlying asset and again will need careful review.
Similar concerns of determining the location apply to Inheritance Tax (IHT), which applies to the worldwide assets of UK domiciles and the UK assets of non doms. Therefore, if coin is regarded as a UK asset, there could be some expensive, unexpected bills. IHT can apply to certain lifetime transfers to non-natural persons, such as companies or trusts, and on the death of the holder. The rate of tax is 40% and, again, HMRC is alert to the possibility of an Estate failing to declare crypto holdings. There will be no defence to argue that the asset is inaccessible, so it is wise to ensure that your testamentary documents are in order and that your personal representatives are able to value and access your digital assets.