UK Crypto Tax 🇬🇧

HMRC Cryptoassets Manual Summary

Crypto taxes in the UK 🇬🇧 can get pretty complicated. But don't worry – we've got your back with this ultimate guide!

From trading to staking, we cover it all.

We've broken down the HMRC cryptoassets manual to bring you the key points and included source material for further reading.

Are you trading or are you investing?

Trading is only taxable if you're trading frequently, with organisation or sophistication. If that's the case, Income Tax takes the place of Capital Gains Tax. But calling it a "trade" isn't enough; the determination depends on various factors.

Exchange tokens are like shares or securities, so the rules are similar to those governing other financial products. Look to existing case law for guidance.

If you're not trading, then it's considered investing, subject to Capital Gains Tax. Guidance on determining whether an activity is a trade or investment can be found in BIM56800 and CRYPTO22000.

Mining

Whether your crypto mining counts as a taxable trade depends on factors like the level of activity, organisation, risk, and commerciality. For example, mining with your home computer usually doesn't qualify as a trade, but setting up a dedicated bank of computers might.

If you're not classified as a trader, the value of cryptoassets received from successful mining generally counts as taxable miscellaneous income (with appropriate expenses). But if you're considered a trader, you need to calculate profits according to relevant tax rules.

Remember, if you hold onto the mined assets, you may have to pay Capital Gains or Corporation Tax when you dispose of them later. Find more at CRYPTO21150.

Capital Gains and Share pooling

When crunching those Capital Gains Tax numbers, share pooling rules come to the rescue. Instead of calculating gains or losses for every single share, you can combine acquisition costs and disposal proceeds into a designated "pool.”

In the UK there are three poolings rules:

Same day rule: If you buy and sell shares on the same day, they're treated as a single transaction for tax purposes.
30-day rule: Shares bought within 30 days of a sale are part of the same pool for calculation of gains or losses.
Section 104 Holding: All shares of the same class in a company that don't fall under rule #1 or #2 count as a single asset. It's like calculating the average cost per asset to determine gains or losses for that asset.

Check out HMRC's awesome examples of pooling at:

CRYPTO22254 - interaction of same day rule with section 104 pool

CRYPTO22256 - interaction of same day rule, 30 day rule and section 104 pool

Getting Paid in Crypto

When it comes to accounting for income tax and National Insurance contributions, everything depends on whether exchange tokens are easily convertible assets.

If they are, employers must value and deduct appropriate PAYE Income Tax and Class 1 NICs from readily convertible asset-based employment income. They can recover that amount from other payments of employment income made to the employee. If not, the employer still owes HMRC the total sum of tax and NICs due.

But here’s the catch: if the employer pays taxes that cannot be recovered, the employee must “make good” their employer's paid deductions. Failure to do so within 90 days after the end of the tax year means additional charges on those liabilities will arise.

For more information about readily convertible assets, check out EIM11900.

Crypto-to-Crypto Exchange

When you exchange tokens, the fee you pay is a deduction when calculating the disposal of the first token and eventual disposal of the second. But keep in mind: the fee can only be deducted once.

If the fee applies to multiple assets, it should be fairly apportioned between them. A 50/50 split between disposed of and acquired assets is usually considered fair.

Mining costs like equipment and electricity can’t be used as expenses for acquiring tokens. But they may still be deductible against Income Tax profits.

If mining is considered a trade, tokens are seen as trading stock. And when businesses transfer tokens out of stock, the value from their trading accounts will determine the cost basis when disposing of tokens. See CRYPTO22150

DeFi - Lending and Staking

While there are no specific legal definitions for these terms, HMRC’s guidance applies to two types of transactions:

Lending - where a lender transfers tokens to a borrower and acquires the right to demand an equivalent quantity of tokens in the future;

Staking or providing liquidity - where a provider transfers tokens to a DeFi lending platform to be used as collateral.

Borrowers then repay the borrowed amount plus interest to the platform, which compensates the provider.

Lending and Earning Interest

Confused about taxes on returns earned through lending and staking in DeFi? Here's the deal for UK residents:

The tax treatment depends on how the transaction is structured, including factors like whether the return is speculative or known. The duration of the lending/staking period and how the return is realised are also considered.

Borrowers: Transferring ownership means disposing tokens at market value, with allowable costs deducted.

Lenders/Liquidity Providers:

Future token quantities treated as ascertainable: Tokens received after borrower satisfies lo
an are considered capital sum from rights; gain or loss may occur if token values changed during loan term.
Future token quantities treated as unascertainable: Marren v Ingles right is acquired by lender and disposed of when borrower satisfies loan; losses can offset gains made on loan.
Liquidity providers withdrawing staked tokens: Consideration for disposal equals market value of tokens received.

CRYPTO61214 provides examples to help explain when the return may be considered revenue (income) or capital.

Lost Private Keys

Losing your key doesn't mean you're off the hook for Capital Gains Tax. But, if there's no way to recover it, you can file a negligible value claim to crystallise a loss.

CRYPTO41500 has all the references you need for further guidance.

Theft and Fraud

If your tokens are stolen, sorry, but HMRC won't let you claim a loss for Capital Gains Tax.

And if you don't receive the tokens you paid for, claiming a capital loss may not be possible.

But there's hope: If your acquired tokens become worthless, you could make a negligible value claim to HMRC and still see some benefit. Just remember, if they were already worthless when you got them, you're out of luck.

Types of Cryptoasset

Cryptoassets come in different types, including exchange tokens, utility tokens, security tokens, and stablecoins. Each serves a distinct purpose, but they all use Distributed Ledger Technology (DLT).

When it comes to taxes, the nature and use of the token matter more than its definition. HMRC doesn't consider cryptoassets to be currency or money - echoing sentiments from the Cryptoasset Taskforce report. And owning and using cryptoassets is legal in the UK, without any implications for tax evasion or other illegal activities.

Stamp Duty

Stamp Duty and Stamp Duty Reserve Tax apply to the transfer of stocks, securities, and partnership interests.

While exchange tokens may fall under these taxes if they meet certain definitions, HMRC currently believes that most won't. If exchanged for such assets as consideration in purchases, exchange tokens count as 'money's worth' and are chargeable based on their pound sterling value. However, since they're not considered currency or money, they don't qualify for Stamp Duty.

Closing

We've covered a tonne of ground: trading, investing, mining, share pooling, getting paid in crypto, DeFi lending and staking, lost keys, theft and fraud, asset types, and stamp duty.

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