Tax Treatment of Cryptoassets

Recent FCA research found that 2.3 million adults in the UK own cryptoassets (also known as cryptocurrency), up from 1.9 million in 2020, and around half of those plan to buy more. 

So what are cryptoassets and how are they taxed?

What are Cryptoassets?

Cryptoassets are forms or mediums of exchange that are digitally secured and can be transferred, stored and traded electronically. 

The name comes from the encryption (cryptography) which used as a means of security.

Bitcoin is probably the most well known cryptoasset and uses a system of public and private keys as security. 

Despite often being referred to as cryptocurrency, HMRC’s view (based on a joint HM Treasury and Bank of England taskforce report) is that cryptoassets are not currency or money.

How are Cryptoassets Taxed?

The tax treatment will depend on how the cryptoasset is being used and the nature of the underlying transaction.

Firstly, it should be noted that whilst 38% of those surveyed by the FCA cited a gamble when considering their reasons for acquiring cryptoassets, HMRC do not view it as a gambling activity therefore the tax exemption for winnings from gambling is not applicable.

It is possible (if perhaps rare) for a person to carry on a financial trade in cryptoassets or to mine cryptoassets, both of which will be subject to income tax. However, in most cases cryptoassets owned by individuals are held as an investment and are therefore more likely to be subject to the capital gains tax (CGT) rules.

This means that CGT may be payable on the disposal of cryptoassets if they are sold/disposed for more than the acquisition or base cost. 

Note that if the same type of cryptoasset is acquired in multiple transactions, then the base costs may be aggregated in what is known as the share pooling rules because otherwise it is not possible to identify which cryptoasset has been sold.

CGT can be triggered not only by a sale but also a gift or transfer to a family member, including transfers of cryptoassets as part of a divorce settlement if the transfer takes place after the tax year of separation.

Where the cryptoasset is secured with a private key and this is misplaced there is no disposal for CGT purposes because the cryptoasset still technically exists.  If there is no prospect of recovering the key or accessing the cryptoasset then HMRC may accept a negligible value claim which will crystallise a capital loss.

Where payment is made in cryptoassets then the receipt will be taxed in the hands of the recipient based on the nature of the transaction – for example as employment income if an employee is paid in cryptoassets, or as turnover for a business that accepts cryptoassets as a payment method.

If you have questions about the tax treatment of cryptoassets, please get in touch by clicking the link below.