In December of 2018, the United Kingdom’s tax agency, Her Majesty’s Revenue and Customs, published a policy paper titled “Cryptoassets for individuals”. The paper is an overview of the HMRC’s approach to taxing crypto, though it’s not official yet. Typical of government documents and tax documents, the paper is rather long and rather dry.
If you haven’t engaged with the paper at some level, you should. For those who live in the UK and have crypto, the paper lays out how you can expect to be taxed on it. If you don’t live in the UK and have crypto, you might live in a country that may look toward this paper for guidance in future cryptocurrency regulation.
For anyone in either of those camps, consider this article to be a sort of introduction to that document, but also consider reading the complete file, available online.
How the Government Understands Crypto
The document begins by explaining HMRC’s understanding of “cryptoassets.” They define cryptoassets as “cryptographically secured digital representations of value that can be transferred, stored, or traded electronically.”
Interestingly, HMRC “does not consider cryptoassets to be money or currency.” This was the ruling of another UK government report on crypto, which was published last summer. The verdict probably explains why the report uses the term “cryptoassets” rather than the more common and familiar “cryptocurrency”. In this article, we will use the term “cryptocurrency” to describe crypto systems. On the other hand, we’ll use “cryptoassets” to discuss tokens within the same cryptocurrency system.
HMRC’s not classifying cryptoassets as money doesn’t mean that they can’t be taxed. Sometimes cryptoassets are taxed similarly to money as in the case of income tax. More commonly, however, they are taxed like property.
The opening of the document further classifies all cryptoassets into the categories of exchange tokens, utility tokens, and security tokens.
Exchange tokens are defined as being used as a method of payment. Utility tokens are defined as “providing the holder with particular goods and services on a platform.” Security tokens are defined as representing interests in a business.
The rest of the document deals primarily with exchange tokens. It also explains that utility and security tokens are being taxed similarly for now but that they will likely get their own tax structures later on. The document also says that taxes apply based on “how cryptoassets are used rather than how they are defined.”
Crypto and Income Tax
The first form of tax that may be placed on crypto is income tax. This is applicable for people who are paid in crypto by an employer or for people who mine exchange tokens. Airdrops and some transactions can also be taxed as income. Crypto received as income may be taxed as income. It may also be taxed upon sale or trade as “capital gains.”
In the case of mining, the exchange tokens collected may be taxable as “miscellaneous income”, or may not be taxed upon collection but upon sale. At that point, they may be taxed as capital gains. Airdrops, on the other hand, may not be taxed as income. If they are sold, the profit may be taxed as capital gains.
HMRC classes the trading of cryptoassets differently. For most people who trade crypto on a more casual basis, the profits may be taxed on the basis of income. For those who trade large amounts of crypto regularly, these transactions could be taxed similarly to shares in a company.
Crypto is also taxed differently if it is given to someone other than a spouse or civil partner. In this case, it may be taxed as income — provided that it is reported. In the event that cryptoassets are donated, the individual is not required to pay a capital gains unless the cryptoassets have gone up in value since their acquisition.
On the topic of reporting, the responsibility to keep all records related to crypto transactions fall to the individual. That also goes for converting the value of the cryptoassets into pounds sterling.
Writing Off Losses
Just as crypto gains can be taxed as capital gains or income, costs incurred can be written off in certain circumstances. While costs for mining activities cannot be written off, transaction fees, some legal fees, and some other expenses, can be.
In the event that cryptoassets are disposed of for less than their cost at the time of acquisition, this may also be written off as a loss under “capital gains losses.” This is only the case for people who trade crypto on a large scale.
In the case of people who exchange assets on a smaller scale, losses can only be written off if the value of a cryptoasset has become “negligible”. A negligible value claim can also be made in the event that a key is lost, or in the event that a victim of fraud buys worthless cryptoassets.
Reporting Crypto from Different Sources
It may sound like all of this could get complicated. And that’s true, especially for people who use more than one cryptocurrency. Things can be simplified, however, through the “pooling” system. This system, originally created for dealing with shares and securities, allows for reporting similar but unusual transactions in bulk. HMRC sees no problem with applying it to crypto.
Under this system, transactions within a cryptocurrency can be grouped into “pools”, one for each different cryptocurrency. Say, one for Bitcoin transactions, one for Ethereum transactions, etc.
Pooling only gets complicated in cases during which a fork in the blockchain creates a new cryptocurrency. The report says that these cases will likely be handled case-by-case.
How to View the Report and This Article
The report is more of a milestone on the UK’s path to approaching crypto. It is also currently a working document. Nonetheless, it would be wise for people who live in the UK to read the whole document.
Other countries have been slow to release similar reports. This report may interest crypto-traders around the world as it could serve as inspiration for similar future reports. For that purpose, this article may be sufficient.