Individuals and trading crypto assets

 In inTAX

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 third in a series of short articles that explore the emerging world of crypto assets, focusing specifically on the tax implications of ‘trading’.

Our previous article in the series considered individuals and capital gains due on disposals, which HMRC considers to be the most usual consequence of someone buying and selling a crypto asset, whether it is a coin or a Non-Fungible Token (NFT). In this article we move on to discuss individuals and trading.

Crypto Assets: Individuals and trading

There are many historical tax cases where judges considered the question of ‘trading’ by individuals in terms of buying and selling shares. If they buy and sell frequently generally most individuals will make some losses. If HMRC readily accepted that people were ‘trading’, any losses may be available to reduce income for tax. However, HMRC did not want that to happen to a significant extent, so has generally been reluctant to view individuals who buy and sell shares as being ‘traders’, preferring to view the purchases as investments with a capital gains consequence, as we’ve covered in a previous article.

HMRC’s own crypto asset manual points out that the approach for establishing if individuals are trading crypto is the same as it would take in relation to shares. Only in exceptional circumstances, where an individual is trading with the frequency, level of organisation and sophistication that someone working for a company trading financial instruments would undertake, is HMRC likely to accept that they are conducting a trade. The guidance is detailed in that regard, and we won’t cover the ‘badges of trade’ and other aspects here. Suffice it to say, you would need to show an exceptional level of knowledge, strategy and time investment to convince HMRC that you were trading crypto as things currently stand.

What if you are a ‘trader’ in crypto?

If HMRC accepts that you are, or possibly argues that you are, profits from transactions become taxable as income and not capital gains. They may therefore be taxable at a higher rate, particularly if your profits are such that you pay higher or additional rate tax. On the other hand, losses may now be available to set off against the profit of the trade, or in some instances against other income.

Again, like with capital gains, HMRC would wish to see an individual who is making trading transactions keep a detailed record of the GB Pound equivalent of all buying and selling events, to ensure profits and losses are recorded accurately.

To conclude in terms of what falls under ‘trading’, currently HMRC is unlikely to agree that anyone other than the most serious of investors has moved an investment activity into a ‘trade’ that is subject to income tax. If the activity is a trade, then income tax rules will apply.

There are also some other instances where HMRC would consider that crypto transactions create income subject to income tax, and we’ll cover those in the next article.

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.

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