Welcome to the tax guide for Cryptocurrency gains. This article is written by a Chartered Accountant and has been reviewed by various experts for accuracy and consistency but it is not to be treated as professional advice.
It’s been a long time coming but we’ve finally had some guidance from HMRC in the form of guidance & answer questions about Cryptotaxation. We are proud to say that their advice matches our own and lays a good foundation for the correct treatment of Crypto currencies on your tax return. If you would like to view the guidance in full click the link below.
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Capital Gains Tax – is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
Disposing of an asset – Disposing of an asset includes:
- selling it
- giving it away as a gift, or transferring it to someone else
- swapping it for something else
- getting compensation for it – like an insurance payout if it’s been lost or destroyed
Disposals of Crypto
The definition of a disposal is written above and many of you will have noticed the problem it causes. As BTC is the entry point into most Altcoins, you must first purchase BTC, then transfer that to an exchange, then to trade that for an Altcoin. With the transaction times and volatility of BTC that value could have risen or fallen quickly, when you trade your BTC for an Altcoin you are ‘disposing’ of your BTC and creating a Capital Gain or Capital Loss.
Where you purchase and sell a large amount of Altcoins this can be a problem, you will need to create a spreadsheet recording the dates and FIAT values of the Altcoin purchases and disposals. Each separate disposal of a Cryptocurrency will be required to be converted to FIAT at the time of disposal. (CG78310)
There is very little guidance from HMRC specifically regarding BTC your tax will be open to challenge from HMRC. In order to file your return as accurately as possible, we will treat Crypto’s as a hybrid between Shares and Currency, following logic seen in previous tax cases and law.
Where the nature of the cryptocurrency means they are dealt in without identifying the particular unit of currency being sold then they should be pooled as per TCGA92/S104(3)(ii) (CG11820). If TCGA92/S104(3)(ii) applies then the holder of the cryptocurrency will have a single pooled asset for Capital Gains Tax purposes that will increase or decrease with each acquisition, part disposal or disposal.
Where you have bought BTC for FIAT currency (£GBP) you will record the £GBP value at the time of the purchase and this will become your base cost. When you sell this BTC in future you will take your sales proceeds received in £GBP and deduct the base costs plus other allowable costs to sell. That is the gain you are taxable on.
Where you’ve bought BTC in tranches it would seem appropriate to hold them under the ‘Section 104 holding’ rules as each BTC is identical to every other and are not separately identifiable. In this instance, your costs will be pooled together with the average cost of your shares forming the base cost on disposals unless your purchase is affected by ‘bed and breakfasting’ and ‘same day’ rules.
When you are disposing of BTC you will be treated as disposing them in the following order.
|First||Shares acquired on the same day as the disposal (the ‘same day’ rule).|
|Second||Shares acquired in the 30 days following the day of disposal (the ‘bed and breakfasting’ rule) provided the person making the disposal was resident in the United Kingdom at the time of the acquisition if the relevant acquisition was on or after 22 March 2007.|
|Third||Shares in the Section 104 holding.|
If the above rules fail to exhaust the shares disposed of, the remaining shares are matched with later acquisitions, taking the earliest one first.
For those of you will disposals under the first or second category above, please consult this HMRC helpsheet for further guidance.
Highly Speculative Gains
HMRC recently updated their CGT manual in December 2017 regarding Cryptocurrencies and gives guidance to their inspectors, but as always with HMRC it’s open to interpretation.
Their paragraph regarding highly speculative gains reads as follows:
Depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example, gambling or betting wins are not normally taxable and gambling losses cannot normally be offset against other taxable profits (CG12602).
HMRC do not give a great deal of information regarding what ‘facts’ would lead to a speculation based purchase and from previous experience, one may expect HMRC to argue that losses were highly speculative and not allowable for any relief, whereas any gains are a taxable profit. Case law will likely be needed for us to definitely say what is treated as highly speculative gains, and it should not be counted on for tax planning purposes.
Best guesses regarding non-taxable highly speculative gains would mean the earlier the adoption of the coins lifecycle the better. ICO’s where anything but theory exists would be the most likely to win any HMRC dispute in my opinion. The recent correspondence from HMRC casts further doubt on this argument as it discusses betting in general and the Carlill v Carbolic Smoke Ball company.
This is a key issue for a large number of users, especially in the ALTcoin arena. If you are deemed to be trading by HMRC then you will be subject to Income Tax treatment on your cryptocurrency profits, not Capital Gains Tax.
The higher echelons of the Income Tax are at the punitive rates of 40% & 45% with an effective tax rate of 60% on any income between £100,000 & £123,000 (caused by the loss of personal allowance)
We believe the best way to analyse Crypto as a substitution for shares in their current format and as such we can gain precedent from case law, especially those summarised in BIM56860 . The ‘Badges of trade’ may be considered but are unlikely to give a useful indication as there is no clear boundaries or checklist as to whether you are, or are not trading.
Salt v Chamberlain was the initial case that decided that Mr Salt was not trading. He had 200 transactions over 5 years and used his mathematical knowledge and skills in order to profit from share movements. It gives us reason to believe that simply buying and selling securities doesn’t constitute a trade, ut highlighted the limited usage of the badges of trade in such a case.
When looking at Manzur v HMRC we can see that he made between 200/300 trades in a year with a mixture of short & longterm holdings. He spent a small amount of time per day (2 hours) and had a mixture of his own expertise and online brokers. He was trading for himself and did not take profits from any clients.
As such they decided that Mr Manzur was managing his portfolio rather than trading in stocks and shares. The HMRC conclusion sums up the situation rather well.
The cases discussed above show that no one factor can determine whether an activity has been taken ‘out of the norm’. Some factors may be more relevant in some cases than in others. You have to take a view after considering the relevant circumstances as a whole.
When calculating the number of trades I’d suggest that any immediate FIAT-BTC-ALT would actually classed as one trade and not two and vice versa. If you are spending less than a few hours a day, have a mixture of long term and short term holdings you may be able to argue CGT as per Manzur. With Crypto being hugely more volatile than the stock market, you may also be able to argue that more time is required to manage a portfolio of cryptocurrencies and the number of trades required is also significantly higher, however that may need to be argued at the tribunal.
It’s one of “overall impression” and HMRC have to displace the assumption that you aren’t trading.
I think the main points HMRC will need to prove are:
- how professionally organised someone is
- how much time they spend on it
- whether they do trades for anyone else
The acquisition cost of the new cryptocurrency will depend on how the new cryptocurrency is distributed. Where each holder of the ‘old’ cryptocurrency is given an equivalent amount of the ‘new’ cryptocurrency then TCGA92/S43 may apply to apportion an appropriate amount of the acquisition cost of the ‘old’ cryptocurrency to the ‘new’ cryptocurrencies that the person acquires (CG15230).
As you have received an asset during the fork, there is no disposal for tax purposes. The base cost you will assign to the fork will be part of the initial investment, there is little guidance on how to assign this. It matters on disposal of the new coins and computing your gains. As long as you follow a reasonably fair approach it’s likely HMRC will accept your valuation of your base cost.
Reporting to HMRC
If you believe you are trading in Cryptocurrencies, rather than subject to CGT then you should register for self-assessment. You will need to draft accounts in order to calculate your tax bill and you must include all incomes for the tax year. Tax years run from 6th April to 5th April (I.e 6th April 2017 to 5th April 2018) You must file your return and pay your tax by 31 Jan the following year (I.E 31 Jan 2019). If you wish to register for self-assessment to pay CGT then can also do this, but it may be easier to use the ‘real time’ CGT service.
You can report the gains any time using this service, but you must file your gains within the same time limits as self-assessment (i.e 31 Jan 2019). It would make sense to follow the self-assessment dates to avoid submitting multiple returns for multiple gains.
Losing & Spending Coins
Where coins are at a total loss (i.e locked out of a wallet) you must be able to prove to HMRC that these are truly no longer your possession. This may be a hard sell to HMRC as there is little proof that you’ve lost access. If the coins were stolen, and you have the adequate police reports of such, they may allow the losses, but it would require significant evidence.
When spending coins you are exchanging an asset for goods or services and as such a disposal has occurred and a gain is required to be computed. If a coin is used for a service and the value has risen and fallen over the course of its use then there may be no gain or loss to report.
For service specific coins you may be able to track the fiat purchase versus the amount of service received, it seems unlikely that any difference in the value of these coins would not breach the CGT allowances for personal usage.
Mining Coins & Staking coins
Mining coins are highly likely to be treated as trading under the income tax regime. They require significant investment into assets in order to generate a service which is paid for by a 3rd party. If income is significant (turnover greater than £1,000) you will work out your profit and loss with income less expenditure. There is likely to be significant costs involved in a mining operation, including capital allowances for plant and equipment purchases.
In 17/18 HMRC issued a new £1,000 trading allowance where micro-entrepreneurs are not required to declare small earning on hobbies. This rule seems to stop people with small hobbies been required to report and pay tax, although it’s unlikely many did. If your mining turnover is less than £1,000 during the tax year, there is no need to declare this income.
Staking coins is using capital accumulated in order to see a set rate of return on that investment. This is likely to be treated as savings income rather than dividend income. As such any staking income below £1,000 (basic rate tax payers) & £500 (higher rate tax payers) is tax-free.
Leaving the UK
Many UK crypto holders will be waiting with baited breath as the rumours of an increase in Capital Gains Tax gather steam in the wake of the pandemic. The Office of Tax Simplification has cited an overhaul has been a large tax generator for the government in coming years by increasing the rates of CGT and lower the annual allowance.
As such more aggressive tax mitigation strategies may be considered such as moving to a jurisdiction with less penal rules on CGT. Firstly we must consider what it takes to leave the UK for tax purposes & how to time this with large disposals.
This article will cover a high level view of the process required & is not advice for tax avoidance, it is simply a consideration of such a strategy. It will not include returns to the UK, application of double tax treaties, or consider in detail local taxation in a new country of tax residence.
It is commonplace that under the Statutory Residency Tests an individual will (or won’t) be a resident for the tax year in its entirety. However there are a specific number of cases where the tax year will be split into two periods, that of UK tax residency and of overseas tax residency.
In order to gain access to split year treatment when leaving the UK one of the following cases must apply:
1. Starting full time work overseas
2. Partner of someone working full time overseas
3. Ceasing to have a UK home
Where you cannot qualify for one of the following cases disposals made within a tax year will likely qualify for UK tax purposes even if you no longer reside in the country (taxed on your worldwide income & Gains). If this is the case, departing immediately prior to the end of the tax year would be a logical point.
These cases only apply where you were a UK resident in the previous tax year & were not a UK resident in the following tax year.
There are significant criteria each of these cases in order to fulfil them correctly.
Non-Resident & Split year treatment
If you are a non-resident for tax purposes then you will only be liable to tax on UK income with no liability on Capital Gains. There are certain exceptions to this CG rule but are unlikely to apply to Crypto assets. Care should be taken where you’re Crypto activities constitute a trade but this will not be expanded upon here.
Should the rules be met for a split year, the tax year will be split into a UK part year & an Overseas part year. The UK part is the tax year that is not the overseas part. The exact dates require specific rules once again, but generally the overseas part starts when:
1. Case 1 – Beginning of overseas employment
2. Case 2 – Beginning of partners overseas employment or date moved overseas
3. Case 3 – Date ceases to have any home in the UK
Moving overseas Admin
Where you do not complete a tax return completing a p85 is good practice. It will notify the authorities of your intentions to leave as well as helping to sort out any overpaid income tax for the year.
If you complete a self-assessment tax return this information will be settled when filed & a note can be included in the whitespace to explain your departure in detail.
An advisor will be able to help you arrange your other UK assets & Incomes and will be able to assist in filing a UK tax return were required.
Once the split year has been completed the tax residency needs to be assessed on a yearly basis. According to the SRT’s. A split year treatment is unlikely to apply until the UK decides to move back to the UK. There are different cases to consider on this return to see with split year treatment applies at that point.
Should you wish to return to the UK care must be taken. The SRT includes tax avoidance provisions which means that if you do not remain outside of UK tax residency for 5 full tax years, CGT will be chargeable on assets disposed of during your temporary non-residence.
Advice should be taken prior to returning to the UK.
Sale of Crypto Assets
When moving abroad the split year treatment will allow for disposals in the overseas part of the tax year, however if possible it would be prudent to dispose of the assets in the proceeding, fully non-resident tax year. This will likely make HMRC challenge less likely & significantly less likely to be successful. Obviously your asset realisation strategy should not be based around tax, but it remains a key consideration.
One must also consider the local tax rules on capital gains of crypto asset at this point, it is likely that the new country of residence has been chosen with this specifically in mind, but taking professional advice prior to the disposal will provide certainty.