Introduction

HMRC’s manual on the taxation of cryptoassets is publicly available. HMRC manuals are written for HMRC staff and set out HMRC’s view of how UK tax laws apply. The manuals can therefore assist taxpayers and their advisors in understanding HMRC’s interpretation of the law. This note provides a high-level overview of HMRC’s approach to cryptoasset taxation.  

HMRC's approach

The UK does not have a specific cryptoassets taxation regime: instead, the UK’s usual tax laws are applied. In their manual HMRC explain that “the tax treatment of all types of tokens [i.e. cryptoassets] is dependent on the nature and use of the token and not the definition of the token”. The manual then goes on to consider the different types of cryptoassets and what this means for the taxation of individuals and businesses. The manual also has specific sections for decentralised finance (DeFi) and compliance, albeit much of the compliance section has been withheld from publication.

Taxation based on substance rather than by terminology provides as much stability to the tax system as possible, since it reduces the extent to which legislative changes are required. HMRC comment that their views may evolve as the sector develops and their guidance may be amended or added to from time to time (and indeed, the cryptoassets manual has already been added to since it was first published).

Definition of cryptoassets

Cryptoassets, sometimes called “tokens”, are defined by HMRC as “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”. HMRC state that all cryptoassets use some form of distributed ledger technology, but not all applications of distributed ledger technology involve cryptoassets.

HMRC provide a list of the main types of cryptoassets which are:

• Exchange tokens, which includes cryptocurrency such as bitcoin (we refer to cryptocurrency in this note).
• Utility tokens, which provide access to particular goods or services on a platform.
• Security tokens, which provide rights or interests in a business, such as ownership, repayment of a specific sum of money or entitlement to share in future business profits.
• Stablecoins, which HMRC summarise as having a premise of minimising volatility as they may be pegged to something with a stable value such as fiat currency (i.e. money such as pounds sterling or US dollars) or precious metals such as gold.

HMRC’s manual, and this note, focus on cryptoassets owned directly, as opposed to, say, financial instruments such as derivatives which have a value linked to the movement in price of an asset such as cryptocurrency. 

Despite the name, HMRC do not consider cryptocurrency to be currency or money, nor does HMRC consider the buying and selling of cryptoassets to be the same as gambling. This means that the tax provisions relevant to currency, money and gambling do not apply to cryptoassets.

Taxation of individuals

Income tax versus capital gains tax (CGT)

HMRC state that “in the vast majority of cases individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases”. This means that UK resident individuals are generally subject to CGT at a rate of up to 20% on gains made on disposal of cryptoassets.

Income tax can apply in some circumstances, such as when income is received due to mining, transaction confirmations or some airdrops. In these circumstances income is typically taxable as miscellaneous income. Employees may be subject to both income tax and National Insurance Contributions (NICs) if they are paid in cryptoassets. Where NIC is due, the employee would be liable to employees’ NIC and the employer would be liable to employers’ NIC.  

HMRC’s view is that businesses, including those undertaken by individuals, buy and sell cryptoassets with sufficient frequency, level of organisation and sophistication to be considered trading only in “exceptional circumstances”, so businesses should only rarely be taxable as trading. If trading businesses accept cryptocurrency as a means of payment for goods and services, returns will be taxable as trading income based on the value received in exchange for those goods and services in the usual way.  

If individuals retain cryptoassets that were subject to income tax on acquisition, CGT may apply on a future disposal.  

Capital gains tax (CGT) – tax points and calculation

Where cryptoassets are within the scope of CGT, as is commonly the case for individuals, any disposal is a tax point which triggers the need to consider whether a gain or loss has arisen.

‘Disposal’ is a broad concept and, in addition to selling cryptoassets for cash, includes exchanging one type of cryptocurrency for another, using tokens to pay for goods or services and making gifts of cryptoassets to other people.

Where cryptocurrency is disposed of the tax rules which also apply to shares are applied. The gain or loss is equal to the disposal proceeds less the base cost of the cryptocurrency. The proceeds are usually the sterling cash received, or the sterling value of any asset received in exchange for the cryptocurrency (e.g. where bitcoin is exchanged for ethereum, the sterling value of the ethereum tokens is used).

The base cost is determined by gapplying specific ordering rules on a cryptocurrency by cryptocurrency basis to acquisitions:  

1. On the same day.

2. Within the following 30 days.

3. From the ‘pool’, which effectively means that gains on disposal are calculated using the average cost of the cryptocurrency.

For example, if an individual buys and sells 100 bitcoin on the same day, he or she would be regarded as disposing of the bitcoin purchased on the same day. If instead ethereum was sold, the ethereum disposal would not be matched to the same day bitcoin acquisition, but instead to any acquisitions of ethereum made on the same day, in the following 30 days or, if none, from the ethereum cryptocurrency pool.

HMRC remark on non-fungible tokens, noting that they are separately identifiable assets and not subject to the share pooling rules. An example of a non-fungible token is digital artwork.

Location of cryptoassets

The location of cryptoassets is relevant to:

• Non-UK domiciled individuals, who may be eligible to use the remittance basis while UK resident, such that foreign income and gains are only taxable if ‘remitted’ (brought into) the UK, and may only be subject to inheritance tax on UK situs assets.
• Taxpayers who need to disclose previously undeclared income and capital gains.

HMRC comment that, for CGT purposes, if there is an underlying asset (e.g. where a token represents ownership of a gold bar), the token is situated where the underlying asset is located for CGT purposes (in this example, where the gold bar is kept). If there is no underlying asset, HMRC state that the asset’s location should be determined based on the tax residence of the individual who owns the asset. This point is relevant to cryptocurrency.

For inheritance tax purposes, HMRC comment that the application of any relevant Double Taxation Treaties should be considered. Where there is no relevant treaty, the common law analysis should be applied (i.e. the legal position).  

HMRC do not comment on the source of income arising from cryptoassets. Source is relevant to both remittance basis users, and to non-UK residents who are only subject to income tax on UK source income.

Corporate taxation of cryptocurrency

Guidance on taxation of businesses

HMRC’s manual contains a section on businesses that undertake transactions involving cryptocurrency. It is relevant to companies, partnerships and sole traders. The application of HMRC’s guidance as it applies to individuals is set out above. In this section of the note, we focus on corporate taxation.  

Approach to corporate taxation

Broadly, companies are subject to UK corporation tax if they are UK resident or have a UK permanent establishment. HMRC consider four potential charges to corporation tax, which are; i)  trading income, ii) loan relationships; iii) the intangibles regime, and; iv) chargeable gains.

Trading income

As set out in the above section on individuals, HMRC's manual remarks that companies only trade in cryptocurrency in exceptional circumstances. If a trading company accepts cryptocurrency as a means of payment for goods and services, trading profits would need to be calculated on the value received in exchange for goods and services in the usual way.   

Loan relationships

HMRC consider that it would be unusual for the loan relationship rules to apply, as cryptocurrencies i) are not money and ii) do not represent a debtor-creditor relationship. An exception to this is where cryptocurrency is used as collateral for an ordinary loan of money or other debt between two parties.

Intangible fixed assets

HMRC state that cryptocurrencies may be taxable as intangible fixed assets if the cryptocurrency represents an intangible asset for accounting purposes and is also an ‘intangible fixed asset’ for corporation tax purposes - this means an asset which is either acquired or created for use as a long‑term asset on a continuing basis. Cryptocurrency that is simply held by a company will not meet this definition. There are further specific rules that apply in some circumstances.

Chargeable gains

HMRC say that the chargeable gains rules should apply where cryptocurrency is held as an investment. The corporate chargeable gains rules are very similar to those of individuals, including the application of share-matching rules, though companies have a “previous 10 days rule” instead of a “following 30 days” rule.

Digital Services Tax (DST)

DST is a 2% tax paid by groups on the revenues that are generated from UK users of certain digital activities. HMRC’s analysis is that “an exchange which has a purpose of facilitating the sale of tokens and, in fulfilling that purpose, enables users to sell tokens to other users, will be an online marketplace”, and thus will be within the scope of the DST. HMRC’s position is that it is unlikely that cryptoasset exchanges would qualify for the DST exemption for online financial marketplaces.

Decentralised Finance (DeFi)

HMRC’s manual includes examples of DeFi arrangements involving the lending and borrowing of cryptoassets. The exact tax position depends on the specific transactions undertaken. In brief, capital returns are taxable as capital gains and income returns are taxable as income. Where returns are income in nature, the return will either be taxable as miscellaneous income or, if the taxpayer is trading, as trading income. While lenders may receive returns labelled as ‘interest’, HMRC’s position is that such returns cannot be interest since cryptocurrency is not currency or money. HMRC is currently consulting on the taxation of DeFi, and so it is possible that changes could be made in this area, depending on the outcome to the consultation.

Value Added Tax (VAT)

HMRC state that VAT is payable in the normal way when goods or services are sold in exchange for cryptocurrency.

In terms of supplying or arranging the supply of cryptocurrency, HMRC consider various circumstances and, in all of the cases considered in their manual, conclude that the matter under consideration is either outside the scope of or exempt from VAT.

HMRC do however note that the VAT position is provisional pending further developments, including any regulatory changes or European Union VAT developments that apply in the UK.

Venture capital schemes

The venture capital schemes, including the Enterprise Investment Scheme (EIS), provide tax reliefs to individuals who invest in qualifying companies. These schemes usually require that a company is trading. HMRC provides examples of some activities that are related to a core business that would not, in themselves, cause the venture capital schemes to be unavailable. These are i) providing goods and services to customers that operate in the cryptocurrency sector; ii) accepting cryptocurrency as payment, and; iii) using distributed ledger technology as a means of recording or publishing information.

The position is less clear for companies that deal in cryptocurrency on their own account; enter into cryptocurrency transactions or broker these for others; and/or that mine cryptocurrency.

HMRC caution that, if a company accepts cryptocurrency as payment, relief may be unavailable or lost due to “substantial non‑trading activities” being undertaken if a high value of cryptocurrency is retained by the company as an investment.  

Companies can apply to HMRC under the non-statutory advance assurance service to request HMRC’s opinion on whether or not a venture capital scheme(s) would be available in respect of proposed investments into the company.

Stamp taxes

Stamp duty and stamp duty reserve tax (SDRT)

Stamp duty applies to instruments that transfer stocks and marketable securities, and interests in partnerships if partnership assets include stocks or marketable securities. SDRT is a related tax and is charged on agreements to transfer chargeable securities. In HMRC’s view, based on their analysis as at 30 March 2021, while each transfer will need to be considered individually, it is unlikely that cryptocurrency would meet these definitions and so these taxes should not apply.  

SDRT would apply if cryptocurrency is used as payment for assets within the scope of the tax, as SDRT applies if payment is made in “money’s worth”. The tax due would be based on the sterling value of the cryptocurrency.

Stamp duty applies where the consideration for assets within its scope is paid using money, stock or marketable securities or debt. The only one of these categories that HMRC consider could encompass cryptocurrency is debt, if there is a debt in the form of cryptocurrency which is released or assumed on a transfer.

Stamp Duty Land Tax (SDLT)

SDLT is payable on purchase of land in England and Northern Ireland. Different taxes apply in Scotland and Wales. HMRC does not consider transfers of cryptocurrency to be a land transactions and so SDLT does not apply to such transfers. SDLT will apply if cryptocurrency is used to pay for the purchase of land, as SDLT applies to purchases made for “money or money’s worth”.