by Daniel Tomassen, Manager – Private Client Department
Cryptoassets are private digital assets that use cryptography and are designed to work as a medium of exchange. In recent years, they have attracted the attention of HMRC who have recently updated its guidance on taxation.
Here we take a brief look at HMRC’s latest guidance and explain the tax implications of owning, selling or trading cryptoassets.
Capital Gains Tax
In the majority of cases, individuals are treated as holding cryptoassets as an investment. They will be potentially liable to pay Capital Gains Tax (CGT) when they dispose of their cryptoassets. For example, if you purchase 1 crypto ‘x’ for £10,000 and sell it a year later for £31,000 you have made a capital gain for tax purposes of £21,000 and will therefore need to pay CGT.
It is worth noting, individuals have an annual CGT free allowance (currently £12,300), which broadly means gains up to this amount are not subject to CGT. Gains above this will be taxable at 10% or 20%, depending on your level of income.
If you sell a cryptoasset for less than what you purchased it for, this will create a capital loss. This loss can be offset against your current gains in the same tax year or carried forward against future capital gains you may realise.
Income Tax and National Insurance
In general, HMRC treat individuals as being investors of cryptoassets. However, in certain circumstances HMRC may argue an individual is trading which would result in income tax and national insurance.
When considering whether an individual is trading, HMRC look at the frequency of transactions, the level of organisation and intention. Other factors such as the size of capital investment, the commerciality of your actions and the risk taken are important.
Cryptoassets may be subject to Inheritance Tax, so if you pass away and hold cryptoassets they would ordinarily form part of your estate.
Inheritance Tax at a rate of 40% is due on your overall value of the estate less various reliefs.
If you gift cryptoassets during your lifetime they will be treated as a potentially exempt transfer, which means that the value will fall out of your estate to the extent you survive seven years.
HMRC do not recognise the transfer of cryptoasset exchange tokens to be within the scope of Stamp Duty. However, they will consider the characteristics and nature of utility and security exchange tokens on a case-by-case basis.
Due to the ever-evolving nature of the underlying technology, the tax treatment of cryptoassets continues to develop and HMRC may make further updates to the guidance.
To stay up to date on the various tax rules for cryptoassets, and to ensure you remain fully compliant, please get in touch.