This week, the U.K. tax authorities (HMRC) published guidance on the taxation of cryptoassets. The guidance states that HMRC does not view such cryptoassets as currency or money – which aligns the HMRC view with the general U.K. regulatory position. The guidance identifies three types of cryptoassets:
- Exchange tokens (including bitcoin and other cryptocurrencies)
- Utility tokens
- Security tokens
The guidance notes that labels do not control; rather, the functionality and substance do. The guidance focuses on the taxation of exchange tokens while noting that it also provides a beginning discussion point for rules that may ultimately be developed for the other types of tokens.
The guidance states that, in the vast majority of cases, individuals hold cryptoassets as a personal investment and hence will be liable to pay capital gains tax on any profits arising when they dispose of their cryptoassets. Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, organization and sophistication that the activity amounted to a financial trade – the profits of which would be subject to income tax rather than capital gains tax.
HMRC specifically notes that it does not consider the buying and selling of cryptoassets to be the same as gambling – the proceeds of which would be tax-free. This is a clear change of position from their March 2014 guidance, which stated "depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable."
Under the U.K. guidance, cryptoassets received from mining or from airdrops may be subject to income tax on receipt, depending upon the nature of the activity giving rise to the receipt. Cryptoassets received as earnings from employment are treated as "money's worth" and are therefore subject to income tax and national insurance contributions.
The U.K. guidance raises questions that are similar to those that must be addressed from a U.S. tax perspective when transactions in cryptocurrency occur. Some of these questions focus on:
- The proper category of property in which to place tokens
- Which types of transactions give rise to taxable gains or deductible losses
- The applicable rate at which to tax gains
- Application of employment compensation rules to cryptoassets (or rights therein), including when there are conditions of continued employment associated with the retention of such rights
- Treatment of cryptocurrency or tokens received in exchange for performing some activity (e.g., mining, social actions, validating)
- Actions that give rise to a taxable gain (or loss) when cryptocurrency is disposed of, as well as planning opportunities that can defer taxable gains
- Tax treatment of forks – both hard and soft
- Record keeping and reporting
In the absence of comprehensive guidance in the U.S. on cryptocurrency issues, taxpayers will borrow from other areas in doing their best to comply with their tax obligations – while identifying opportunities to optimize their tax situations when applicable doctrines permit.
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