HMRC have so far failed to take a substantive position when it comes to their stance on cryptocurrencies. Their 2014 Brief is particularly vague, commenting that the tax treatment will depend on the activities and the parties involved; and whether any profit or gain is chargeable or any loss is allowable, will be examined on a case-by-case basis.
The approach therefore needs to be considered as follows:
- Corporation tax: The profits or losses on exchange movements between virtual currencies are taxable in accordance with the general rules on foreign exchange and loan relationships.
- Income tax: The profits and losses of a non-incorporated business will be taxable under normal income tax rules.
- Chargeable gains and losses: If a profit or loss on a currency contract is not within trading profits or within the loan relationship rules, it will be chargeable or allowable for CGT.
- Where a business accepts payment for goods or services in the form of cryptocurrency, it is to be treated in the same way as a payment made in sterling.
Cryptocurrency held as an investment
Cryptocurrencies are treated as fungible assets for tax purposes, meaning that individual units are interchangeable and not separately identifiable from each other. Each type of cryptocurrency should therefore be ‘pooled’ separately, with further acquisitions or disposals of the same asset being recognised as an addition to, or a disposal from the pool. For this reason, it is important that comprehensive records are maintained.
A potentially chargeable event will occur for CGT purposes whenever a form of cryptocurrency is converted to fiat, or traded for a different form of cryptocurrency. This requires identification of the historic cost of the asset disposed or traded, in order to calculate the gain/loss arising by virtue of the proceeds received (or the value of the alternative cryptocurrency asset acquired in its place).
While many individuals have acquired cryptocurrencies on a purely speculative basis, there are other investors who have taken a much more active role in their acquisition.
These activities sometimes take the form of ‘mining’ operations, which involve the use of computer hardware/software to solve algorithms and generate a cryptocurrency reward. While cryptocurrency mining is always at least likely to be considered as trading for tax purposes, the scale and frequency of activities will need to be considered to establish whether or not income tax treatment should apply. CGT treatment becomes less likely when activities move away from those of an investor, and become more akin to those of a trader. The key question to consider is whether or not trading is being carried out with a view to the realisation of profit.
Information in relation to cryptocurrency activities should be reported on tax returns, stating what has occurred during the year, and the rationale for the treatment that has been applied. By ensuring that a sufficient level of disclosure has been applied, HMRC are rendered incapable (under usual circumstances) of revisiting the position outside of the normal enquiry window.
At present, the onus is very much on the taxpayer to decide if the correct treatment is being applied, and as time goes on we will no doubt see increased scrutiny of cryptocurrency transactions on the part of HMRC. Advice is key.
Our tax team has considerable experience of advising and reporting on cryptocurrencies. Contact your local branch if you require assistance.