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The pitfalls of crypto assets – Tax considerations

Posted on 07 Nov 2022, by InTAX Ltd

The pitfalls of crypto assets – Tax considerations

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 first in a series of short articles that will explore the emerging world of crypto assets, focusing specifically on the tax implications of engaging in transactions and what HMRC are doing to keep pace with this rapidly growing market. Tax is often, if not always, full of nuanced minutiae and we can’t cover all situations, but we’ll aim to cover some of the key themes and issues.

Contrary to the widely adopted name ‘Cryptocurrencies’, items like Bitcoin are not currencies in HMRC’s eyes. The name relates to the way that many investors view this technology – as an alternative to their native currency.

So why do HMRC refer digital ‘coins’ as crypto assets?

It relates to tax. Firstly, in HMRC’s view, buying and selling crypto assets is most closely paralleled with buying and selling shares and their view on how individuals with crypto assets should be taxed reflects that. Secondly, if it were viewed as a currency, then movements in value might not be taxable in some circumstances, for example using Bitcoin to buy something outside of the UK for personal use.

In a largely unregulated market, crypto assets have created a tax minefield where UK taxpayers are engaging in chargeable transactions, possibly without even realising.

Individuals – Capital Gains – ‘The Starting Point’

When an individual buys and then sells a crypto asset, whether it is a ‘coin’ or other asset like a Non-Fungible Token (NFT), HMRC is likely to view that transaction as an investment, and any gain will be subject to Capital Gains Tax (CGT). Indeed, HMRC states in its Crypto Manual that for most individuals, in most cases, the tax in point will be CGT. The advantage for individuals is that the current standard CGT rate of 20% is lower for many people than their marginal income tax rate, plus there is an annual allowance which can exempt part of the gain from tax.

Based on HMRC’s view, buying and selling crypto becomes very much like the occasional buying and selling shares for most people from a tax point of view.

However, if an individual conducts a lot of transactions in the same manner that a ‘trader’ would, it may be that HMRC would view any profits as income, rather than gains, and tax it that way at marginal income tax rates of up to 45%. We’ll cover more detail around trading for individuals in a later article.

Anecdotally, it appears that many who have invested in crypto are younger than traditional investors in the stock market. With limited experience, these investors may not understand that any profit is taxable, never mind the challenge of establishing the correct tax treatment. In addition, judging from some of the questions that we have been asked, many do not understand in what circumstances a gain arises.

Having established that HMRC views crypto as an asset, and that, for individuals most profits on a transaction will be subject to CGT, we’ll cover more on the question of what is a ‘Chargeable Transaction?’ 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.