HMRC has published a new policy paper on cryptoassets (like crypto currency and bitcoin). Over more recent years we have seen the popularity of cryptoassets grow. However, very rarely do we come across queries in relation to how such assets are taxed – although this could well change in the years to come!

Previous HMRC guidance suggested that highly speculative transactions in cryptoassets might be considered gambling, which is effectively outside the scope of tax. However, in a change of position, HMRC’s latest guidance confirms that they no longer consider that the buying and selling of cryptoassets will be the same as gambling.

The new policy paper sets out HMRC’s view - based on the law as it stands at the date of publication – about how individuals who have cryptoassets are taxed. The paper does not consider the tax treatment of cryptoassets held for the purposes of a business carried on by an individual, however HMRC will produce more information on this at a later date.

Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:
  • Transferred;
  • Stored; or
  • Traded electronically.

HMRC does not consider cryptoassets to be currency or money. This reflects the position previously set out by the Cryptoasset Taskforce report (CATF). The CATF have identified three types of cryptoassets: exchange tokens; utility tokens; and security tokens. HMRC’s paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens.

In its guidance, HMRC confirms that:
  • Most individuals hold cryptoassets as a personal investment and, as such, will be subject to capital gains tax (CGT) on gains and losses.
  • S104 pooling applies, subject to the 30-day rule for 'bed and breakfasting'.
  • A capital loss may be claimed in the event that a cryptoasset becomes of a negligible value – although evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
  • It will be rare for investment in cryptoassets to be regarded as trading, although 'mining' or ‘airdrops’ (see below) are likely to indicate a trading activity and, as such, income tax will take priority over capital gains tax and will apply to profits (or losses).
  • If an employer awards cryptoassets, these are taxable as employment benefits.
  • If they fall within the description of readily convertible assets they are subject to PAYE.
  • HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme.
  • Cryptoassets will be property for the purposes of inheritance tax.

‘Mining’ is where an individual uses a computer(s) to carry out computational tasks as part of the underlying digital ledger and can receive cryptoassets as payment. Where the individual is not trading, such fees are treated as miscellaneous income. ‘Airdrops’ are allocations of cryptoassets where the individual may or may not have to perform a service to receive the allocation. If the individual does not have to perform a service, and is not trading, then the receipt can be tax-free. Otherwise, the receipt will be considered miscellaneous income.

HMRC has also produced guidance for individuals to check if they need to pay income tax or national insurance contributions when they receive cryptoassets or if they need to pay CGT when they sell cryptoassets.