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Her Majesty’s Revenue and Customs, the UK government department responsible for the collection of taxes, on Wednesday published tax guidance for people who hold crypto assets.
The paper, “Cryptoassets for individuals,” sets out the agency’s view of the appropriate tax treatment of cryptoassets, and outlines what taxes crypto users may need to pay, and what records they need to keep.
“HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report (CATF),” it said, adding that the task force has identified three types of crptoassets – exchange tokens, utility tokens, and security tokens.
HMRC clarified that the tax treatment of all types of tokens depends on “the nature and use of the token and not the definition of the token.”
“This paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens. For utility and security tokens this guidance provides our starting principles but a different tax treatment may need to be adopted,” it added.
According to the document, individuals who hold cryptoassets as a personal investment will be liable to pay capital gains tax when they dispose of their cryptoassets, while those who receive cryptoassets from their employers as a form of payment, or from mining, transaction fees or airdrops will have to pay income tax and national insurance contributions.
“As set out in more detail below, there may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits. This is likely to be unusual, but in such cases Income Tax would take priority over the Capital Gains Tax rules. HMRC will publish separate information for businesses in due course,” HMRC added.
Importantly, an individual who is trading cryptoassets may be able to reduce their income tax liability by offsetting any losses from their trade against future profits or other income. In case of capital gains tax losses, HMRC said, “Certain ‘allowable losses’ can be used to reduce the overall gain, but the losses must be reported to HMRC first.”
The report goes on to explain how individuals can easily calculate their tax liability, including in the event of blockchain forks. It also outlines the costs that can be allowed as a deduction when calculating if there’s a gain or loss.
