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Cryto Assets – UK Tax Position

Crypto tax is a very hot topic today with the huge changes in the value of Bitcoin, Ethereum et al.

Here are some thoughts on the matter you may find helpful.

If you have a stake in the world of electronic currencies and want to know more, please get in touch.

HMRC’s viewpoint

  • There is no specific Cryptoassets (CAS) tax legislation.
  • The tax position will depend upon a number of factors such as the level of activity involved, how the CAS were acquired and what happened to the CAS in your possession.

When might a capital gains tax liability arise?

  • When you sell CAS for money.
  • When you exchange one type of CAS for a different kind of CAS.
  • When you use CAS to pay for goods or services.
  • With the exception of your spouse or civil partner, when you gift CAS to another person

When might an income tax liability arise?

  • When you receive rewards from mining, staking and/or airdrops, such as receiving free (or below market value) CAS and/or a share in future transaction fees.

When might an income tax and national insurance liability arise?

  • When you receive CAS as a result of your employment.
  • When the level of your activity in CAS could be deemed to be trading.

When might a corporation tax liability arise?

  • When the CAS activity is conducted through a company.
  • When the business sells goods or services in exchange for CAS.
  • When the company buys and sells CAS.
  • When the company exchanges CAS for other assets, for example, other types of CAS.
  • When the level of the company activity in CAS could be deemed to be trading.

Why is it important to keep proper records?

  • To enable you to declare the appropriate gain/income/profit in the body of your Tax Return and accounts, where applicable, and pay the correct amount of tax over in a timely manner.
  • To substantiate a loss claim, where one has arisen, and to utilise it in the most tax efficient way.
  • To successfully deal with any enquiry raised by HMRC as regards your CAS activity. Please note that HMRC have a number of arrangements in place with CAS exchanges for them to provide information regarding UK CAS investors/traders. 
  • It would be wise to keep proper records for 6 tax years.

Records to be kept

  • You should keep your own records for each crypto transaction. Some exchanges only keep records of transactions for a short period of time or may no longer be in existence at the time when you are completing a tax return.
  • Retain cold and hot wallets as they have the private and public keys. Cryptoassets are digital assets and therefore all records in a wallet should show balances and transactions, either in full or via reference to a public blockchain (ledger).
  • Other records of transactions and balances, such as downloads from the wallet activity from a cryptoassets exchange. Most exchanges will allow you to download CSV files of the ‘trading’ activity. A separate email address could be set up to email across the files. Be careful that no security details are included within the information emailed across.
  • Use a cryptocurrency portfolio tracking app such as Coin Tracker, Blockfolio or Crypto Compare, for example, which can track transactions across a number of exchanges.
  • Consider taking screenshots of the ‘trading’ activity.  
  • Bank statements showing the flow of fiat currency (Government backed currency, e.g. sterling) into and out of cryptocurrency. It would be preferable to have all activity going through one designated bank account.

Evidence required

  • The type and number of CAS held.
  • Details of the nature of the transactions involved and when they took place.
  • How did the CAS come about – acquisition, mining, airdrops or forking for example?
  • The value of the transaction in sterling as at the date of the transaction.
  • The level of the fees received or incurred and the nature of those fees

If you are arguing that there is ‘trading activity’ happening, there may be a need to demonstrate the degree of activity, the risk, the commerciality and the level of organisation involved. 

Be aware of the risks

  • Fraud, hacking, theft. For example – some people, paid to look after your private key, simply running off with your wallet. This may result in you, the owner of the CAS, being unable to access them as you no longer have the private key.
  • Where the wallet is lost or destroyed it may also result in you, the owner of the CAS, being unable to access them as you no longer have the private key.
  • Some investments advertising high returns based on CAS may not be subject to regulations beyond anti-money laundering requirements. 
  • Significant price volatility in CAS, combined with the inherent difficulties of valuing them reliably, place consumers at a high risk of losses.
  • There is no guarantee that CAS can be converted back into cash. Converting CAS back into cash depends on the demand and supply existing in the market.
  • Charges and fees may be more than regulated investment products.
  • Marketing material – firms may overstate the return or understate the risk.
  • A HMRC enquiry may occur so it is imperative to keep proper records and evidence.

If you have a stake in the world of electronic currencies and want to know more, please get in touch at 01438 811771 or roberth@robertaharris.co.uk

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