Multiple tax tools now exist to help crypto users and businesses from the industry with tax reporting. But in a field as fluid as the crypto space, regulations change rapidly. On Nov. 1, HMRC published updated policy papers concerning crypto transactions undertaken by companies, other businesses such as sole traders and partnerships, and individuals.
Her Majesty’s Revenue and Customs (HMRC) has updated its guidelines on the taxation of transactions involving crypto assets. The United Kingdom’s tax authority clarifies its stance on cryptocurrencies and explains which taxes apply to specific activities carried out by business entities and private individuals.
Taxable Activities Listed
The agency notes that the documents deal with the tax treatment of “exchange tokens”, explicitly mentioning bitcoin. They do not apply to tokens issued in initial coin offerings (ICOs). The taxation of security and utility tokens will be addressed separately in the future. Taking into account the specifics of the fast-changing industry, HMRC says it will look at each case and apply the relevant provisions.
The tax office has listed a number of crypto-related activities that give rise to tax obligations. These include buying, selling and exchanging tokens for other assets, including cryptocurrencies. Crypto mining has been mentioned as a taxable economic activity. Businesses providing goods or services in return for digital coins also owe taxes to the British government.
The guidelines review the applicable taxes as well and corporate entities conducting any of the aforementioned activities are likely to be liable to pay one or more of the following taxes: capital gains tax, corporation tax, income tax, value added tax (VAT), and stamp taxes. National Insurance contributions are also due.
Private individuals will be liable to pay capital gains tax when they sell crypto assets that have been acquired as a personal investment, or income tax and National Insurance contributions on coins they receive from employers, mining or airdrops. Traders may reduce their income tax liability by offsetting losses against future profits. The amount paid for an asset is considered a cost that can be allowed as a deduction. The loss of a private key, however, does not count as a disposal of the assets for capital gains tax purposes. Victims of theft cannot claim a loss either.
Cryptocurrency Not Money
HMRC addresses other important aspects of taxation concerning crypto-related transactions. The authority emphasizes that taxable profits, and losses respectively, should be calculated and reported in British pounds on tax returns filed by companies and individuals. In case a transaction does not involve GBP, an “appropriate exchange rate” must be established in order to convert the transaction to fiat.
The agency does not explain clearly what it would consider an ‘appropriate’ valuation but stresses that a “consistent methodology” should be used. The papers further emphasize that profits from a crypto trade must be calculated in accordance with either the U.K. generally accepted accounting practice (UK GAAP) or in accordance with international accounting standards (IAS).
The requirement to keep records in fiat equivalent has to do with the tax department’s current stance on decentralized cryptocurrencies. “It is important to note that HMRC does not consider any of the current types of cryptoassets to be money or currency. This means that any Corporation Tax legislation which relates solely to money or currency does not apply to exchange tokens or other types of cryptoasset”, the administration points out.
However, the tax regulator remarks that “if an employer ‘pays’ exchange tokens as earnings to an employee, those exchange tokens count as ‘money’s worth’.” In other words, crypto salaries paid in the United Kingdom are subject to income tax and National Insurance contributions on the fiat value of the cryptocurrency used for remuneration.