Meg Saksida explains when you need to concern yourself with tax associated with cryptoassets.
The Bank of England defines cryptoassets or cryptocurrencies as combining two things: ‘crypto’, being hidden or secret and ‘reflecting the secure technology used to record who owns what and for making payments between users’; and ‘currencies’, ‘a type of electronic cash’.
The big difference between the cryptocurrency and cold hard cash, however, is that our notes in the sterling currency have the backing of the central bank (the UK government), whereas cryptocurrencies use a ‘peer-to-peer’ system, meaning there is no backup should anything go wrong.
Examples of cryptocurrencies are Bitcoin (the most famous), Ripple, Litecoin, Ethereum, Dogecoin, and Coinye.
Taxation of cryptoassets
Cryptoassets are qualifying assets for capital gains tax (CGT) purposes. Therefore, any gain made on the disposal of such a token will require a CGT calculation, and if a gain is made that exceeds the annual exempt amount of the taxpayer (currently £12,300), CGT at either 10% or 20% will be due on the gain.
In order to have a capital gain, three components are required: a chargeable person (broadly a UK resident individual); a chargeable asset (the cryptocurrency); and a chargeable disposal.
A chargeable disposal of a cryptoasset will not only occur when the token is sold. Exchanging or bartering the tokens will also be a chargeable disposal, as will be giving away the tokens to anyone other than your spouse or civil partner (even sometimes a charity). However, the transaction that is most misunderstood is the disposal made by using the token to pay for goods and services.
Calculating the gain
Each transaction made of the cryptocurrency will require a separate CGT transaction, and the length of time for which they are held will determine how the transaction is calculated.
As with all other qualifying assets, the gain is extracted by comparing the proceeds (or market value if the cryptocurrency is gifted or sold at undervalue) with the historic cost. The proceeds can be reduced by incidental costs of disposal. HMRC identifies some typical incidental costs of disposal, including:
- transaction fees paid before the transaction is added to a blockchain;
- advertising for a buyer or seller;
- drawing up a contract for the transaction; and
- making a valuation so you can work out your gain for that transaction.
The cost is made up of three parts: the historical cost of the cryptocurrency; incidental costs of acquiring the cryptocurrency; and any enhancement expenditure made to the currency while the taxpayer has owned it.
The historical cost of the cryptocurrency is calculated by assuming that all the cryptocurrency of the same type has entered one group or pool. This is called ‘pooling’ the cost of the tokens, and (unless a blockchain fork has occurred - outside the scope of this article) an average cost per coin purchased at the point of disposal will be calculated. This is very similar to the process for shares which, too, have a ‘pool’ for all similar shares a taxpayer has purchased. Also, like shares, repurchases of cryptocurrencies on the same day or up to 30 days after the sale will be outside the pool, and matched with disposals first.
Practical tip
Generally, individuals hold cryptoassets for capital appreciation. However, income tax and National Insurance contributions will be required if cryptoassets are received by an employer or from mining, transaction confirmation or airdrops, or if the individual is running a business trading in cryptoassets. If income tax has already been charged on the earnings of the cryptocurrency, only the increase in value post-ownership of the disponer will be chargeable to CGT.
