The Taxation of Income from Cryptocurrencies in Various Jurisdictions (Part 13): United Kingdom
By Rikesh Patel, Lawrence Grant, Chartered Accountants
“Cash is king” is one of the key expressions used by clients to express the importance of cash flow for businesses. As the world changes and technology advances, I wonder if in future the expression will change to “crypto is king”.
For many of us, including accountants, lawyers and tax advisors, cryptocurrency has been something of an unknown until recently.
Cryptocurrency is a relatively new type of asset that has become more prevalent in recent years. Current technology has led to cryptocurrency being created in a wide range of forms and for different uses. The cryptocurrency sector is fast-moving and developing all the time. The terminology and types of coins, tokens, and transactions can vary.
What is cryptocurrency?
Cryptocurrency is cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically.
While all cryptocurrency uses some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptocurrency. HMRC currently does not consider cryptocurrency to be currency or money. There are three main types of tokens:
- exchange tokens;
- utility tokens;
- security tokens.
The term token is used as a synonym for cryptocurrency, which is also known as cryptocurrency token. The tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token. This article considers the taxation of exchange tokens (similar to Bitcoin) and does not specifically address utility or security tokens.
At present, HMRC said UK tax legislation “does not include any special tax rules for income, profits or gains arising from transactions involving cryptocurrencies, or for charges made in connection with cryptocurrencies”. There is no Case Law regarding cryptocurrency as no cases have been brought to a UK tax tribunal.
Which taxes apply? Capital gains tax
In most cases, individuals hold cryptocurrency as a personal investment for capital appreciation in value or to make some purchases. They will be liable to pay Capital Gains Tax (CGT) when they dispose of their cryptocurrency.
If an individual discards cryptocurrency for less than their allowable costs, they will have a loss. Certain “allowable losses” can be used to reduce the overall gain, but the losses must be reported to HMRC first. Normal CGT rules will, therefore, apply, such as allowable deductions at arriving at capital gains and pooling where assets are bought and sold. It usually occurs in the tax treatment of securities and shares purchased at different prices and sold at various intervals.
Income tax and national insurance
Individuals will be liable to pay income tax and national insurance contributions on cryptocurrency they receive from their employer.
There may be cases where the individual is running a business, which is carrying on a financial trade in cryptocurrency and will, therefore, have taxable trading profits. It is likely to be unusual, but in such cases, income tax would take priority over CGT rules.
An individual who is trading may be able to reduce their income tax liability by offsetting any losses from their trade against future profits or other income.
HMRC does not consider the buying and selling of cryptocurrency to be the same as gambling.
Inheritance tax (IHT)
For the purpose of inheritance tax, cryptocurrency will be part of the property chargeable to (IHT). Standard IHT rules are therefore applicable to the asset.
For companies, exchange movements are determined between the company’s functional currency (usually the currency in which the accounts are prepared) and the other currency in question. No special tax rules for cryptocurrency transactions are required. The profits and losses of a company entering into transactions involving cryptocurrency would be reflected in accounts and taxable under standard corporation tax rules.
With the reducing level of corporation tax over the years and the lack of clarity in respect of cryptocurrency, HMRC has provided very little guidance in this area.
Rikesh PatelLawrence Grant, Chartered Accountants, London, UK
T: +44 208 861 75 75
Lawrence Grant, Chartered Accountants provide UK and international accountancy and taxation services to companies and individuals considering investment opportunities within the UK. Rikesh Patel is a tax specialist on owner managed businesses and individuals.
Rikesh provides innovative tax solutions and astute tax advice for clients over a broad range of sectors. The main areas of taxation he specialises in are UK property taxes and advisory on cross border matters.
Publlished: Spring 2019