Taxation of Crypto Assets

With the increase in online crypto transactions, it is critical to have an early understanding of the tax implications of HMRC, among other areas of cryptocurrency law. Investors, individuals, and businesses all need clear and consistent tax rules that establish tax liabilities to improve certainty and minimise costs. 

From a tax authority perspective, an effective tax framework is equally important in order to enable compliance and reporting on transactions, minimise tax evasion, and build trust in crypto assets.

Application of the existing tax framework

As HMRC does not recognise crypto assets to be currency or “money” and in the absence of specific legislation, the tax treatment of crypto assets relies on the existing tax system and is dependent on their nature and use of them.

2. Income Tax

Crypto assets may be subject to income tax in the following situations:

• An employee receiving crypto assets as non-cash remunerations may be liable to income tax and national insurance contributions on the value of the crypto asset received as a “notional payment”
• As previously mentioned in the blog “Understanding Cryptocurrencies”, crypto assets are generally held as investments. However, in exceptional circumstances, individuals trading crypto assets could trigger an income tax liability. HMRC will assess each situation by taking into consideration the “frequency, level of organisation and sophistication” of the activity.

2. Capital Gain Tax

In most cases, HMRC considers that crypto assets are typically held as personal investments which would attract capital gains tax on the disposal of any gains realised. Consequently, normal tax principles relating to capital gains would apply.

The Finance Act 2011 and HMRC can require the disclosure of customers who have received payments over a certain threshold and this may have individual implications for capital gain tax liability.

The tax treatment of mining

Crypto assets can be awarded to “miners”, as a reward for generating new crypto currencies and verifying new transactions.

The facts in each case determine whether the mining activity amounts to trading, this is a question of degree and level of activity. For instance, a single computer carrying out the mining activity is unlikely to amount to a trade and trigger a liability to income or corporation tax while a large bank of computers engaging solely in the process of mining with a view to making a profit may amount to a trading activity.

If the mining activity does not amount to a trade, the pound sterling value (at the time of receipt) of any crypto assets awarded may be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.

On the other hand, if the mining activity does amount to a trade, income or corporate tax rules need to be considered.

Finally, the process of staking whereby crypto assets support a blockchain network and confirm transactions would be subject to the same tax treatment as mining.

If you are unsure about the tax treatment applicable to your crypto assets or your crypto currency activities you may need advice from specialist Crypto and digital asset solicitors.

How Can Ellis Jones Help?

Our team of expert solicitors have a wide range of specialisms relating to cryptocurrency, digital assets and tax, successfully handling a number of cryptocurrency tax related cases on behalf of our clients.

If you feel you need any advice on crypto assets and their tax treatment, please get in touch with our Digital Assets team on 01202 525333 or email Richard Smith on richard.smith@ellisjones.co.uk.