As individuals and businesses diversify their portfolio, crypto assets have become more common. It's one of those high-risk, high-reward assets that people are starting to dabble in. In recent times this has been under much focus with governments around the world rushing to regulate stable and other tokens.
It's therefore relevant to understand how taxation works for crypto transactions in the UK. At the outset, we want to point out that this article is only for purposes of information and should not be taken as personal tax advice. Each individual or corporate have unique circumstances. So please seek professional advice before decisions are made regarding your crypto assets or transactions.
Here are some notes to get you started,
1) Income tax
Income tax is usually applied to those buying, selling or receiving cryptocurrency through a trade. A ‘day-trader’ is probably the most obvious example – someone who actively buys and sells crypto assets to create short-term profit. However, individuals are unlikely to meet the description of a ‘trader’ for income tax purposes if trading on their own account, so they will likely be considered under the capital gains tax regime. To fall into the definition of ‘trading’, you would need to buy and sell crypto assets with such intention, sophistication, frequency and level or organisation that the activity amounts to a financial trade.
If you meet the trading threshold, net profits will be subject to income tax at 20%, 40% and 45% (based on the tax bracket your income falls into) as well as the relevant national insurance bracket.
General income tax thresholds in the UK are as follows as a quick guide,
Income (in Pounds) | Tax (in %) |
0 - 12,570 | 0 |
12,570 - 50,270 | 20 |
50,270 - 150,000 | 40 |
150,000 and above | 45 |
2) Capital gains tax:
In most cases, anyone buying, holding and selling cryptocurrency on their own account are considered to be undertaking investment activity and will be subject to capital gains tax.
Disposing of crypto assets will result in a taxable event. Individuals pay capital gains tax on their total gains above an annual tax-free allowance. Any gains above this allowance will be taxed at 10% up to the basic rate tax band (if available) and 20% on gains at the higher and additional tax rates.
There is no tax for holding crypto in wallets as a taxable event can't be deemed to have occurred. What is interesting is that swapping crypto is also considered a taxable event. eg if you swap your BTC to a stable, it maybe construed as a taxable event and would attract cap gains.
2) Taxes relevant for Companies
For corporates that hold or deal in crypto assets, a thorough understanding of the Cryptoassets Manual published by HMRC in March 2021 and recently updated would be a worthwhile exercise.
The manual mentions the following types of taxes that are relevant for corporates,
Capital Gains Tax (CGT)
Corporation Tax (CT)
Corporation Tax on Chargeable Gains (CTCG)
Income Tax (IT)
National Insurance Contributions
Stamp Taxes and
VAT
As one can imagine the nuances included in each of these sections are myriad. A succinct presentation is therefore difficult. You simply must explore the topic most relevant to you. Here are some notes,
- Corporation tax on chargeable gains
Chargeable gains in this context mean any profit/gains you've made from holding and disposing crypto assets.
The manual clarifies
If a company holds exchange tokens as an investment, they are liable to pay Corporation Tax on any gains they realise when they dispose of it.
What constitutes a disposal in this context? Any activity such as selling tokens for fiat, exchanging tokens from one to the other (such as from BTC to stable), using tokens for payments and giving away tokens to another person are all considered disposal.
- Corporate revenue received in crypto
Companies may accept crypto currencies as a mode of payment for the services they render. Stable coins are commonly accepted in the crypto world nowadays. HMRC's manual as an example, if a company carrying on a trade accepts exchange tokens as payment from customers, or uses them to make payments to suppliers, the tokens given or received will need to be accounted for within the taxable trading profits
- VAT
VAT in general is a complex area of tax compliance. With crypto it doesn't get any easier. The general guidance from HMRC says, VAT is due in the normal way on any goods or services sold in exchange for crypto asset exchange tokens. The value of the supply of goods or services on which VAT is due will be the GBP value of the exchange tokens at the point the transaction takes place. No further example is provided.
We interpret this to mean that businesses should assess in a normal way if VAT would be applicable for a business transaction or not. Simply because you might settle a bill or a customer pays you in crypto, VAT doesn't disappear. However, HMRC does clarify that Exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that: the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and there is no customer for the mining service
In conclusion, crypto transactions are increasingly becoming a focal point with governments and institutions around the globe taking a keen view of how these should be treated. There are known tax friendly nations for crypto holders (or hodlers) whereas other nations have restricted the use around them. Whichever way the world evolves, we're sure to see increased interest and scrutiny from tax regulators where crypto is involved.
Have questions around crypto usage and holding in your company, please get in touch and we can chat you through your queries.
Notes and references
Primary source - https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto45000
https://cryptoslate.com/german-crypto-tax-policy-one-of-the-best-in-the-world-coincub-report/
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