Posted on March 10, 2019
Crypto Asset Tax: The New HMRC Guidance- ETC Tax
In order to create a clear picture regarding the taxation details of cryptocurrencies, including exchange tokens like bitcoin, Her Majesty’s Revenue and Customs (HMRC) recently released a comprehensive and elaborate framework. This tax framework clearly explains the handling and taxation of cryptocurrencies and other related financial policies.
After the release of these guidelines, investors will have a clear picture regarding the tax treatment and calculation of their cryptoassets. Here is what you need to know about these guidelines to understand how these changes might affect your crypto tax.
Cryptocurrency tokens under HMRC guidance
Famously known as cryptographically secured virtual representation of value, cryptocurrency or cryptoassets can be stored in your wallet, transferred to another wallet, and traded. All these functions are done using Distributed Ledger Technology. Crypotassets are not considered to be real money or currency, and are identified as either security tokens, utility tokens, or exchange tokens.
● Security tokens provide distinct interests in businesses, for example, profit share.
● Utility tokens give access to purchase of goods and services.
● Exchange tokens are largely used for payments and their value depends on exchange and investment.
The HMRC guidance treats different types of tokens according to their nature and intended use. The first report of the guidance considers taxation of only exchange tokens, for example, bitcoins.
Taxes applicable under HMRC guidance
HMRC lays clear differences between gambling and cryptoassets and does not consider them to be the same. Consequently, distinct guidelines for crypto currency tax calculation are highlighted in this report. The following types of taxes might be applicable in cryptoassets, subject to individual cases:
● Direct income tax
A direct income tax is levied on exchange tokens under the following circumstances.
1. Financial trading
If the holder of cryptoassets carries out trading with them, he/she is liable for a direct income tax under specific circumstances. If so, this income tax will supersede Capital Gains Tax and considered as a business. The business income manual accompanying HRMC guidance has all details pertaining to this tax calculation.
2. Crypto mining taxes
Mining with cryptoassets typically involves use of computers to generate new cryptoassets. Depending on the degree of mining, risk associated, commercial alignment, and organisation of this activity, it will be considered a taxable trade. If it so happens that mining cannot be considered a trade, the corresponding Pound Sterling value of these cryptoassets will be considered taxable.
3. Taxes for airdrops
When an crypto currency investor receives tokens as part of a random selection, these tokens come with their own specifications that work differently from the rest of cryptoassets. Accordingly, income tax may or may not be applicable on these tokens. However, the disposal of these tokens may lead to Capital Gains Tax.
● Capital Gains Tax
When cryptoassets are used for investment rather than trading, individual investors are subject to Capital Gains Tax. Since cryptoassets are intangible, they are considered to be chargeable only if they can be owned and possess a net value.
When cryptoassets are sold off in exchange of money, used for payment, given away to others or exchanged to another type of crypto currency, they are considered to have been disposed, and are subject to Capital Gains Tax accordingly. However, if they are donated, they are exempted from this tax.
What are allowable costs under the guidance?
Tax deductions may be used for lowering your crypto currency taxes. These deductions will depend upon the consideration paid originally for acquiring the asset, incumbent transaction fees, professional costs, costs for making valuation, and any costs for advertising.
Mining costs are not included in these costs because they are not dedicated to acquiring crypto currency only. However, part of these costs is eligible for tax exemption, for example, upon declaring these costs against profits or upon disposal of mining equipment.
What about cryptoassets as earnings?
If your cryptoassets include those earned in the form of an income of any kind, they will be counted in terms of their money’s worth. Coinsequently, they will be liable for income taxation. Specific guidelines exist for cryptoassets that are Readily Convertible Assets (RCA) and not RCAs. These cryptoassets are clearly defined in the HRMC guidance, and related information should be read carefully to make full use of applicable deductions, wherever possible.
In addition, there might be some cryptoassets that are given by employers or another party as payment for certain tasks. If they arise because of an employment, they are treated for income tax. Employers must disclose such details to HRMC for proper tax calculation.
Implications for the investor
As an immediate outcome of the guidance, the entire responsibility of maintaining records and tracking transaction details lies on the investor. It is thus prudent to rely on a suitable cryptotaxsoftwareto maintain records and details of The number and types of token you possess in your wallet, their total value in Pound Sterling, accompanying bank statements, disposal details etc. Additionally, investors are also required to keep complete records of their wallet addresses and get all their transactions categorised into trade, investment and value.
Also, since the guidance has clearly outlined the circumstances under which a particular transaction will be taxable under different categories, it is important to establish the identity of the cryptoassets as RCAs, and benefit from specific deductions. The last date for declaring and paying cryptocurrency taxes for the financial year 2017-2018 is 31st January 2019.