Cryptocurrency investors and traders could be caught out by unexpected tax liabilities

Jaykishan Shah, Director said:

There is confusion whether tax is liable when it comes to cryptocurrency as HMRC does not consider cryptocurrencies as currency or money, but rather as assets for tax purposes.”

However, as investors and businesses look to realise potential gains, perhaps through a transfer back into conventional currencies, exchange between alternative cryptocurrencies or transfer to so-called ‘stable-coins’ they may inevitably trigger a taxable event (stable-coins are cryptoassets designed to have a relatively stable price, typically pegged to an underlying currency like USD, and allow individuals to keep liquidity on a cryptoexchange with reduced risk of volatility).

HMRC take the view that most individuals will hold cryptoassets (‘tokens’) as a personal investment for capital appreciation if they expect the value to increase over time. These gains will be subject to capital gains tax (CGT) when they dispose of their tokens.

If an individual receives cryptoasset tokens in exchange for employment then income tax and national insurance would be due on receipt. Income tax rules may also apply if an individual receives tokens through staking, mining or other activities considered to amount to a trade, although HMRC considers these circumstances to be much less common.

For individuals subject to CGT rules on their cryptocurrency transactions, a taxable event occurs when an individual disposes of their cryptoasset. This is a broad concept and can include:

•  selling tokens for money
• exchanging tokens for a different type of token
• using tokens to pay for goods or services
• giving away tokens to another person (unless it’s a gift to their spouse or civil partner.)

Calculating the taxable gain or loss involves several considerations and potential challenges:

Acquisition Cost: The cost of acquiring tokens, including certain allowable fees and charges, is deducted from the disposal proceeds to calculate the gain or loss. Where investors acquire tokens over a period of time, perhaps through a ‘dollar-cost-averaging’ strategy, the acquisition cost relating to the disposed tokens will require computation. HMRC pooling practices applied to shares also apply to crypto, whereby rather than tracking the cost basis of each unit of cryptocurrency individually (as done in methods like First-In-First-Out (FIFO)), share pooling involves computing the average cost basis of all units within the pool. Additional rules apply to transactions occurring on the same-day and within a 30-day period which can further complicate cost calculations.

Disposal Proceeds: The proceeds from selling or disposing of tokens, including any fees or charges incurred during the transaction, gives the initial basis for a gain or loss calculation. Care must be taken to determine an appropriate valuation at the point of disposal as many tokens and exchanges do not report in pound sterling. If the transaction does not have a pound sterling value, for example if one token is exchanged for another, an appropriate exchange rate must be established to convert the transaction to pound sterling for reporting to HMRC.

Allowable Expenses: Certain expenses incurred in the course of buying, selling, or managing tokens may be deductible, such as transaction or exchange fees. Costs associated with depositing or withdrawing sterling are not allowable, and costs associated with exchanging between token types or costs of transactions involving multiple assets can be more complicated.

Capital losses: Unlimited capital losses can be offset against capital gains to reduce tax liabilities arising on gains. Losses can be carried forward indefinitely but must be registered with HMRC by recording them on a self-assessment tax return. HMRC allow up to four years to register losses.

Record keeping: Individuals will need appropriate data on transactions carried out to compute taxable gains or losses for reporting to HMRC. Trading platforms and exchanges may not necessarily retain this information in a suitable format for tax reporting, and the onus is on the taxpayer to keep their own records in case of HMRC review or enquiry. Some trading platforms allow direct synchronisation of trading activities with third-party tax calculators which may be of benefit to individuals.

If an individual is subject to a taxable capital gain, they will be taxed at either 10% (basic rate) or 20% (higher rate) for gains in excess of the capital gains tax allowance of £3,000 from April 2024 onwards.

Would you like to know more?

If you would like to discuss the above matter, or to confirm how this impacts you or your company, please get in touch with your usual Blick Rothenberg contact, or Jaykishan using the form below.