First things first, there is HMRC guidance available, but it is important to acknowledge that (at present) HMRC are just sitting very firmly on the fence.
“Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts.”
This has meant that a number of articles have been published outlining the availability of various treatments to minimise your liability. To a certain extent this is true, but we can’t just pick the most favourable treatment available and apply this to all situations. As the quote above states, a case by case approach needs to be followed and this needs to be backed up by the tax treatment that follows the facts of your particular case.
Currency vs Asset
I want to start by considering what we are talking about here as the moniker of crypto-currency is not an accurate one.
Definition of money (i.e. currency)
– A store of value with which to transfer purchasing power from today to some future time;
– A medium of exchange with which to make payments for goods and services; and
– A unit of account with which to measure the value of a particular good, service, saving or loan.
As crypto-currencies can’t effectively be used as a medium of exchange or a reliable unit to measure value, it is hard to believe that it can be considered a currency – see Mark Carney’s assessment of this. In time I believe we will come to see the term crypto-currency disappear, welcome to the world of crypto-assets.
NB: This will not impact upon their tax treatment.
We must first consider the Badges of Trade to assess whether an individual’s exposure to crypto-assets is a ‘trade’. E.g. is there
– Intention to make profit?
– Repeated transactions?
– Quick turnaround?
Another way to look at this is considering whether you are an ACTIVE or PASSIVE investor. This is important as the potential tax liability is significantly different.
So as a rough guide, a one-off purchase of a few coins that are retained, consider yourself a passive, not trading investor. Where multiple transactions take place, consider yourself an active, trading investor.
Active – Trade – treat as a foreign currency, revalue at year-end and taxable on the gain or losses. (Losses can be offset against other gains if the business does something else as well).
Passive – Capital rules to be followed. One particularly important point is to maintain a detailed record of your transactions as this will impact on the profit you are taxed upon when they are sold.
If trade, up to 45% tax as well as National Insurance(NI) (from 2% – 9% depending on other income). If capital, up to 20%.
Active – Trade – revalue at year end and taxable on the gain or losses.
Passive – Short-term – NTLR* – treat as if a trade.
Passive – Long-term – Capital – only taxed on disposal, fixed asset costs are held back in the tax computation for offsetting against any profit on disposal.
When revalued at the year-end rate, any gains or losses made after 1/4/17 can be offset against any other gains or losses in the company in the year and in future years. If the company has previous losses they may be able to utilise these against crypto profits, but only if they are of the same type (trade or NTLR). Likewise, crypto losses may be carried back against prior year profits, but only of the same type.
19% tax arises, but further tax may be payable to extract the funds from the company. 10% if entrepreneurs or investors relief can be utilised. Up to 45% (plus NI) if income over £150k – though you can manage the extraction or profits to minimise this.
*NTLR – Non-Trade Loan Relationships – a classification of income and expenditure under UK tax law.
II have read many arguments that an individual or company involved in mining should only see their gains become taxable when they convert back to fiat. However my opinion is that when a crypto-asset is sold any gain or loss made on this crystallises. Whether it is sold for another crypto-asset, gold or fiat seems to be irrelevant. For example, if you sold Apple shares in exchange for Microsoft shares, you would still be taxed on your gain at the point of sale.
The main thing to consider as a crypto-asset miner is that when you dispose of an asset, any costs to obtain this asset may be deductible in calculating the capital gain. So an investment in equipment or data centre space could be deducted from the sale value to reach the ‘profit on disposal’.
However, in all cases we still need to consider Active vs Passive. If you have a home computer running some of its spare CPU power doing some mining, fine, capital gain. However, if you have purchased the components, built a GPU rig and are actively managing the coins you are mining then lets be honest, this is a trade. It is most easily likened to receiving commission for work carried out, which is also classified as a trade.
HMRC’s guidance in 2014 noted that crypto investment could be considered gambling, this persists among investors hoping to limit their tax liability. However, it is my opinion that this will not hold up.
“A bet is merely an irrational agreement that one person should pay another person on the happening of an event.”
Source: HMRC Definition & Guidance
This however does not hold true for most crypto investments and HMRC will update their guidance at some point to remove this myth – at this point be prepared to pay tax.
The exception to consider is Initial Coin Offerings (ICOs). A much touted statistic in early 2018 showed that 59% of ICOs from 2017 had failed or were likely failures that had just to be confirmed. If you can demonstrate that a number of your investments in the crypto space had not been successful, then maybe, just maybe, there is a gambling angle to be found.
However, typical articles of association will prohibit companies from gambling so this is not an option for an incorporated business.
And what can we do about it?
HMRC have said they will consider each situation on a case by case basis, and that is what we (as responsible advisors) must also do. We have the knowledge and the understanding of the crypto space and the various issues it presents, as well as a number of clients across a variety of the examples included above.
This enables us to consider the facts and base our recommendations on the latest guidance and information available. Our aim is to ensure you don’t get it wrong and receive a hefty tax bill you aren’t expecting a couple of years down the line.