Introduction 

Individuals are increasingly creating and acquiring cryptocurrency and other digital assets, such as non-fungible tokens (NFTs). NFTs are unique digital assets and may, for example, represent artwork, logos or other assets.

We are currently assisting a number of our clients who are involved with cryptoassets to help them understand and correctly report their tax position, taking into account matters such as the specific cryptoassets involved and the individual’s residence and domicile position. This note comments on the tax position of UK resident individuals.   

This document contains some key points that we would advise affected individuals to consider. In this note, we focus on individuals who own cryptocurrencies and NFTs, though we could also assist with regards to other types of cryptoassets and assets owned by other entities, such as trusts and companies.  

We pride ourselves on providing personal, practical and comprehensive client service. If you would like to discuss any of the matters covered in this document, please contact your usual Deloitte contact or one of the contacts at the end of this document.

Key considerations

UK resident individuals who own cryptoassets should ask themselves the following questions and consider whether it is necessary to obtain professional tax advice: 

• Do I trade, invest in, or receive income from cryptoassets? 
• Have I identified all taxable income and disposals of cryptoassets in every relevant tax year and calculated and reported income, gains and losses arising on these appropriately? 
• Who is the beneficial owner of the assets and what impact does this have on the tax position? 
• What non-UK taxes might be relevant and have I considered the potential exposure to double taxation?

UK approach to taxation of cryptoassets

• No specific tax legislation applies to tax cryptoassets. Instead, existing tax laws are applied. 
• HMRC have published a “Cryptoassets Manual”, which among other matters, explains how HMRC consider that cryptocurrencies should be taxed. Some types of cryptoasset are not specifically commented on in the manual, such as NFTs. 
• While HMRC have published their view of some aspects of cryptoasset taxation, there are areas of uncertainty, notably in terms of the location (situs and source) of cryptoassets and resultant availability of the remittance basis for UK resident, non-UK domiciled taxpayers. 

Income versus capital

• An individual’s tax position is determined by several factors, including whether they receive returns that are in the nature of ‘income’ or ‘capital’. 
• Income returns are subject to up to 45% income tax, and potentially National Insurance Contributions (NICs). 
• Key situations which can cause income tax and potentially NICs to apply to individuals include individuals trading, being paid in cryptocurrency by their employers, mining, confirming transactions and some airdrops.  
• The factors that must be considered to determine if there is a trade include the frequency, organisation level and sophistication of transactions. HMRC’s view is that trading in cryptocurrency is rare. 
• It is common for returns to be classed as ‘miscellaneous income’, which occurs if a return is income in nature but where activity falls short of trading.  
• Capital returns are subject to up to 20% capital gains tax (CGT). 
• Capital returns may arise on disposal of cryptoassets that individuals acquired as an investment, for example, purchase of cryptocurrency on a platform for investment purposes, or where assets that were originally taxable as an income receipt (e.g. when paid by an employer) are retained as an investment.    
• ‘Disposal’ is a broad term which, in addition to selling cryptoassets for cash, includes exchanging one type of cryptoasset for another (e.g. disposing of bitcoin in exchange for ethereum), using cryptocurrency to pay for goods and services and making gifts of cryptoassets.
• Statutory rules apply to determine whether there has been a disposal and to calculate any chargeable gain arising. For cryptocurrency the statutory rules that apply to shares are applied. 
• Income, gains and losses must be calculated using the sterling value of income, costs and proceeds, even if sterling has not been used in the transaction. Gain calculations can be highly complex.

Situs and source

• UK resident, non-UK domiciled individuals may be able to pay tax on the “remittance basis” of taxation, such that UK tax will only be payable on non-UK source income and gains if they are “enjoyed” in the UK. 
• It must therefore be determined whether 1) income from or capital gains arising on disposals of cryptoassets are UK source and 2) whether the acquiring of a cryptoasset constitutes a remittance to the UK.
• HMRC’s view is that if there is no underlying asset (as is typical for cryptocurrencies), the situs of cryptoassets is where the person who beneficially owns the asset is resident. Therefore, HMRC consider that UK residents are ineligible for the remittance basis on gains made on disposal of cryptocurrency. This approach also means that losses should be considered UK source, such that relief can be always be claimed.  
• If there is an underlying asset, which may arise in the case of NFTs, HMRC’s view is that the location of that asset will determine the situs of the cryptoasset.
• HMRC have not commented on the source of income arising from cryptoassets. 
• For completeness, trading income is not eligible for the remittance basis unless the trade is carried on wholly outside the UK. This point is fact specific, but if an individual is UK resident the trading income is highly likely to be taxable in the UK. As noted above, we understand that HMRC consider that trading in cryptocurrencies is rare in practice.

Decentralised Finance (DeFi)

• Returns from DeFi (such as yield for lending and staking cryptocurrencies), are often regarded as income. This can include DeFi returns that are labelled ‘interest’, which are typically taxable as miscellaneous income. 
• Some returns may be capital in nature, and so gains would be subject to CGT. Depending on the specifics of the transaction, it is possible that a capital disposal could occur when cryptoassets are lent or staked, which could give rise to reporting and tax liabilities at the outset of arrangements. 
• It is necessary to analyse the facts of each DeFi arrangement in order to determine whether returns should be taxed as income or capital in nature, and the amount of income or gain that has arisen. 
• A consultation on DeFi taxation is currently underway and so it is possible that changes could be made in this area, depending on the outcome of the consultation. 

Information available to HMRC

• HMRC have a range of powers to obtain information, including being able to obtain information from financial institutions about a specific taxpayer without the need for approval from the Tax Tribunal. HMRC enforcement activity includes raising enquiries into specific returns, and also writing to numerous taxpayers as part of ‘one to many’ campaigns asking them to check they have disclosed and paid all taxes correctly.  
• Additional disclosures will soon be required from taxpayers as, from the 2024/25 tax year, taxpayers who complete capital gains pages to tax returns will need to disclose if they have made disposals of cryptoassets. 
• HMRC, and overseas revenue authorities, also receive information through international information exchange agreements. Taxpayers with international affairs should therefore ensure that they have considered their worldwide liabilities and reporting requirements. 

Creating Non-Fungible Tokens (NFTs)

A range of points should be considered when individuals and other entities such as companies, are considering creating NFTs, including:

1. Advice on the design and creation of new products and services involving NFTs, including; early-stage commercial planning, delivery and technology design through to implementation support, engineering and post-launch services, such as hosted cloud services;

2. Advice on the tax implications of creating NFTs, including; income tax and corporate tax on profits; VAT and any withholding taxes that may need to be applied on sales; and.

3. Legal implications such as intellectual property (IP) considerations, commercial contracts, financial regulatory aspects, GDPR and data protection, and employment advisory related services.

These are complex matters and professional advice should be sought.