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Cryptic crypto tax rules, or clarity at last?

Specialist crypto-accountant Joe David presents a brief overview of recent changes to the taxation regime for cryptoassets in the UK. 

8th Apr 2021
Founder Myna Accountants
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Bitcoin - most well known example of a cryptoasset exchange token
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At the end of March, HMRC released updated guidance on the taxation of cryptoassets. The new internal document combines the individual and business tax manuals into a more concise and easier to navigate set of guidelines. But while the guidance doesn’t offer any drastic changes, it still leaves many unanswered questions.

Updates to HMRC rules and manuals announced by HMRC can either be small tweaks to gray areas or more widespread changes – but sometimes even small changes can become bones of contention for both accountants and law makers.

This time round, roughly 95% of the tax manual stayed the same. The main updates bring greater clarity and uniformity to HMRC’s stance on cryptoasset taxation in areas such as staking, transferring coins between ledgers and cryptocurrency as a form of gambling. 

Staking a claim

HMRC clarified that any income derived from staking is taxable. The process happens when holders of particular cryptocurrencies “stake” an element of their holding to support the creation of the blockchain in return for reward.

From now on, rewards derived from staking will need to be accounted for as miscellaneous income on a tax return.

Transferring coins between ledgers

HMRC also provided clarity around the movement of coins between ledgers in relation to how a cost basis is calculated. The new guidelines determine that the coins would remain at the original cost basis when moved. Therefore, the cost would be carried forward for any future disposal.

Investing, not a gamble

Despite the often volatile nature of markets and the view from some quarters that crypto currency is more akin to betting than investing, the new guidelines confirm that the government does indeed see the process as investing rather than gambling.

While clarity around gambling versus investing is welcome, it shouldn’t come as a surprise. As many will know, gambling proceeds in the UK are exempt from CGT and income tax – so classing the buying and selling of cryptocurrency as gambling would only dent the coffers of the Treasury.

Capital gains vs income tax

Indeed, the wider capital gains tax (CGT) vs income tax debate has also been somewhat demystified as part of the update to guidelines.

Currently, cryptoassets are taxed under CGT in the UK, in much the same way as stocks and shares. There are exceptional circumstances where individuals may be classified as traders, in which case income tax would apply as any gain could be classed as personal income. 

While some might see this as a loophole, HMRC holds the view that people are extremely unlikely to become cryptoasset traders merely for tax purposes, so the switch in taxation would only apply in very few cases.

For example, if an individual receives cryptoassets as remuneration from employment, they will be liable for income tax and national insurance as they would be for any cash payment received. The same income tax treatment will apply to activities such as mining, transaction confirmation and airdrops.

On the whole, cryptoassets purchases and disposals are classified in a similar way to shares in that they are “pooled” into asset classes, and disposals are calculated from the pool. Same day trading and “bed and breakfasting” apply to cryptoassets just like they do to traditional share dealing.

Still work to be done

Since the guidelines were released, I have spent time talking to a range of accountants and advisers about the updates. While welcomed the new, more uniform approach, many voiced frustrations that the update lacks a regulatory framework. Many advisers feel that this could undermine the HMRC manuals, both the recent edition and those released in the future.

But seeing as the sector is so fast paced, it’s probably no surprise that HMRC has taken a piecemeal approach to legislation and that changes and clarifications will be shared and introduced in time. My team and I are working very closely with Crypto UK, the trade body for crypto in the UK, to help shape and drive regulatory changes within the market. Over time, we hope to help the crypto industry and HMRC drive change rather than just respond to it.

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By drtoctoc
09th Apr 2021 21:50

One of the things that is still unclear is the situs or location of cryptoassets that are not exchange tokens. This could have implications for non-domiciled individuals. It seems that security tokens or those representing a physical good will be deemed located in the country of issuance. However, there is still no rule about utility tokens.

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