What are "cryptoassets" according to HMRC?
Also referred to as 'tokens' or 'cryptocurrencies,' HMRC defines cryptoassets as secured digital representations of value or contractual rights that make use of some form of distributed ledger (blockchain) technology. What kinds of cryptoassets exist?
Cryptoassets are categorized by HMRC as follows:
- Exchange Tokens: assets that are intended to be used as a means of payment. These are the tokens that would be more widely thought of as 'cryptocurrencies,' such as Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP). Ethereum may also be considered an exchange token, although it may fit better in the next category.
- Utility Tokens: assets that are issued by a company which has committed to accepting the assets as payment for goods or services in the future. These tokens are frequently issued as a form of fundraising in initial coin offerings (ICOs) and can be traded on exchanges or peer-to-peer.
- Security Tokens: assets which entitle the owner to particular rights or interests in a business, such as a share in ownership, in profits, or in the future repayment of a sum of money. HMRC intends to address the tax treatment of security tokens in future guidance. We will update this post when that occurs.
- Stablecoins: Tokens that function in much the same way as exchange tokens while being 'pegged' to another asset that is thought to have a stable value. Tether (USDT) is perhaps the most well-known example of a stablecoin, with a value more or less equal to the United States dollar. Despite the separate categorization, it seems HMRC largely treats stablecoins as exchange tokens.
- Non-Fungible Tokens: HMRC recognizes NFTs as cryptoassets which are separately identifiable.
Importantly, HMRC's tax treatment of these types of tokens is dependent on how
the token is used, not on the definition of the token. An exchange token that is used as a security will be treated as a security. Furthermore, none of these token types are considered to be money equivalents. Which taxes apply to businesses that deal with crypto?
Depending on how the company uses its cryptoassets, it may be liable to pay one or more of the following: capital gains tax, corporation tax on chargeable gains, income tax, national insurance contributions, stamp duties, and VAT. How are capital gains taxes on cryptocurrency calculated?
Capital gains taxes are paid on the difference between the buying and selling price of assets.
Oftentimes, the purchase cost of a single asset varies drastically. For example, token A may have been purchased for 100 pounds in 2014. Later, the same investor may have increased their portfolio by two tokens in 2019, paying 1000 pounds. In 2020 they may have purchased another five tokens for 3000 pounds.
In situations like this one, HMRC makes use of a share pooling method that defines the buying price at time of withdrawal for the asset as its average acquisition cost. Since eight token A were purchased for 4100 pounds, the acquisition cost for tax purposes would be 512.5 GBP.
Each cryptocurrency owned is grouped into its own pool. To illustrate, in a portfolio that includes Bitcoin, Ripple, and Litecoin, there would be three pools. It does not matter that these are all "exchange tokens." Following a hard fork, new tokens need to be grouped into their own pools. So, if Bitcoin were to fork, the original token and the 'new' token on the main chain should each be considered separate assets.
In short-term trades, "same-day" and "bed-and-breakfast"
rules are applied. As NFTs are separately identifiable, they do not need to be - and indeed cannot be - pooled. In what currency are taxes calculated?
All tax calculations are carried out in pounds sterling. If an exchange token transaction is undertaken on an exchange that does not display a value in pounds, an appropriate exchange rate must be established in accordance with the Generally Accepted Accounting Practice (GAAP).
For the purposes of filling out a tax return, the value of profits, gains, and losses must be converted to pound sterling following GAAP. While companies may choose to designate another national currency (i.e. USD/EUR) as its functional currency, tax returns must be still completed in pounds at the end of the accounting period. Do foreign currency rules apply to crypto transactions?
No. Since HMRC does not consider cryptoassets to be money or currency, these rules do not apply.