With HMRC’s latest updates to their cryptoasset manual in February 2022, the days of it being uncharted territory are coming to an end. The update in question provides advice regarding the tax treatment of cryptoassets, allowing traders to efficiently organise their digital assets. However, does the new guidance cover enough ground?
What’s The Difference Between Trading And Investing?
People often mistake what counts as ‘trading’ in their tax returns. In laymen’s terms it means to buy or sell something. But HMRC’s manual states that only in exceptional situations would they expect people to buy and sell exchange tokens with such complexity, organisation, and frequency that it amounts to a financial trade.
Normally if a cryptoasset, like a non-fungible token (NFT), is brought then sold the seller would be liable for capital gains tax on any profit made on the sale. This, along with gains related to the ownership of any other assets like shares or property would need to be considered.
If someone has obtained or invested in a cryptoasset with the intent of profiting from it, HMRC would likely view this as an investment, making it liable for capital gains tax. But if a person or company is a part of the creation, minting and selling of the NFT it would be seen as a ‘trade’ by HMRC making it subject to income tax.
To simplify everything, HMRC’s Cryptoassets Manual gives thorough guidance with links to further resources. Though for people who are not used to self-assessment tax forms, it can be too complex and heavy.
While the manual uses cases to show detailed points, they are unlikely to fully relate to a unique person’s situation. Traders should begin with a list of their transactions and understand how the guidance relates to them specifically, as opposed to just picking the best tax regime.
What Are HMRC’s 9 Badges Of Trade?
HMRC also has a manual which outlines the ‘9 badges of trade’ to aid in defining trading activity to accompany the Cryptoassets Manual. The badges include a profit-seeking motive, the number of transactions that occur and the way the sale is carried out. With the nine badges as a checklist, asset holders can work out if their transactions count as trading or not.
When there is uncertainty the decision lies with HMRC. But, there is a procedure in place to appeal if the asset owner disagrees. In such cases, companies must consider consulting a professional as they can identify the records and evidence required to argue their case.
People trading cryptoassets must keep complete records of their transactions as they go, which can be sent to professionals at the end of the tax year. Each time funds are exchanged between different types of cryptocurrency, for instance, Ethereum to Bitcoin, HMRC counts it as a chargeable event. This is because, for tax purposes, this transaction is treated as both a disposal and acquisition of an asset.
Traders with a high volume of transactions must also seek specialist guidance. Most tax professionals will use software that automatically tracks transactions, with the client’s permission, simplifying tax declarations at the end of the year. Because of this the transactions will not have to be calculated manually, saving time and money. Your tax advisor will require access to any digital wallets, or other places where you store your cryptoassets.
Are There Any Areas That HMRC’s Manual Does Not Cover In-Depth?
As HMRCs guidance is still fresh, there are some ‘grey’ areas up for interpretation. For instance, with a ‘bridging transaction’ which is where cryptoassets are converted from one format to another.
Debate remains over whether these ‘bridging transactions’, such as converting Wrapped Ethereum to Ethereum, count as a chargeable event.
Currently this transaction is treated as a disposal for capital gains tax purposes, which could give rise to a tax liability.
What do you need to consider with HMRC’s view of trading?
Although HMRC’s manual is helpful, unless the reader is a specialist it is likely to create confusion. A trader who wants to calculate their own tax liability, with the information provided, would be advised to get this reviewed and approved by a tax professional.
This is vital when each transaction has a large value, or a high volume of transactions have taken place, as it will provide a better certainty over the ultimate tax liability. Traders can be sure that regulations in this space will increase in the future, as HMRC understands more about cryptoassets and the tax revenues they can provide.