Individuals and other crypto derived income

Crypto assets are here to stay, but as the ‘new kid on the block’ in contrast to more traditional options, they can cause uncertainty around the area of tax implications.

This is the fourth in a series of short articles that explore the emerging world of crypto assets, focusing specifically on the tax implications of income derived from crypto assets.

We’ve previously covered the general consequences of individuals buying and selling crypto. In most cases, this will be covered by capital gains rules, and in some exceptional cases by income tax rules. What about other income for individuals that is not derived from buying and selling?

For example, what if an employer pays their employees’ wages using Bitcoin? If the crypto asset used as payment is a ‘readily convertible asset’ (HMRC is likely to take this view in relation to Bitcoin etc.) then the employer will need to deduct income tax and NICs from that payment, just the same as if the payment was in GB pounds, using the GB pound value at that time.

The further complication is that, if that payment of Bitcoin is not encashed by the employee into GB Pounds immediately, and it subsequently goes up in value, Capital Gains Tax (CGT) may be due on that increase in value whenever those Bitcoins are sold or traded.

In terms of ‘mining’ or ‘proof of work’ activity, unless the income was less than the equivalent of £1,000 in a tax year, then it will likely be taxable as ‘miscellaneous’ income. In some circumstances, if the activity is seriously conducted, the activity will count as a trade and again it will be subject to income tax, but with different rules on losses. The usual considerations around the deductibility of related expenses will apply. Again, if the assets are held and increase in value, any disposal may well attract CGT.

Similarly, crypto assets supplied as a reward for ‘staking’ will be treated as either miscellaneous or trading income, depending on the sophistication and extent of that activity.

The ‘airdropped’ or free crypto assets sometimes provided to platform members to raise awareness of a new asset will not be taxed on issue if they are truly provided with no expectation of work being done in return. As usual, any increase in value is likely to be taxed as a capital gain on disposal. If, however, the provision of the asset is done in expectation of a service, for example marketing, it may be that the receipt of the token will be taxable as either miscellaneous income, or possibly as trading income, if the individual is already considered to be a person who is ‘trading’ in crypto for tax purposes.

To conclude, receiving wages in crypto will be subject to the same rules as if you were paid in fiat currency. Income from mining or staking is likely to be subject to income tax rules, unless it is below £1,000 in a tax year. Finally, ‘Free’ tokens might be taxable if they are provided in expectation of a service.

In our next article, we will look at some of the considerations for businesses and companies involved in transactions with crypto assets, specifically tokens such as Bitcoin.

If you have any questions about tax on crypto assets, or tax issues in general, please get in touch on 0203 675 8122 or email Jeremy at jeremy.johnson@intaxltd.com.