HMRC’s Cryptoassets Manual is published

On March 30, 2021, a new internal Cryptoassets manual was published by the HMRC on its website followed by the amendments as of April 8, 2021. The initiative reflects the evolving nature of cryptoassets and the areas in which they are used. Despite being prepared for internal use of HMRC stuff, the Manual is aimed to help people better understand the tax implications that may arise from activity involving cryptoassets and the HMRC’s approach to the interpretation of the relevant legislation. The Manual provides for a brief introduction to and explanation of how the HMRC understands cryptoassets and concentrates on their tax treatment under the two sections: Cryptoassets for individuals and Cryptoassets for businesses; Compliance[p1]. 
 
Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically, which HMRC does not consider to be currency or money, and stipulates that their tax treatment is dependent on the nature and use of the token and not the definition of the token.
 
The first section, Cryptoassets for individuals, defines circumstances and cases in which the following taxes may be applied:

HMRC’s general approach is that individuals hold cryptoassets for the capital appreciation as a personal investment and therefore will be liable to pay Capital Gains Tax with the allowable deductions upon the disposal of their cryptoassets. A broad concept of a ‘disposal’ includes: selling tokens for money; exchanging tokens for a different type of token; using tokens to pay for goods or services; giving away tokens to another person (unless it’s a gift to their spouse or civil partner).

Where the nature of the tokens means they are dealt in without identifying the particular tokens being disposed of or acquired, pooling should be applied, which allows for simpler Capital Gains Tax calculations.

Another approach provides for cases where the Income Tax will take the priority over the Capital Gains Tax. HMRC treats the last scenario as “likely to be unusual”, but in exceptional circumstances, taxpayer’s activity may be considered to be trading. It will depend on the number of different conditions such as frequency, level of organization, sophistication and ultimately be a question of a fact. HMRC draws an analogy between trading in exchange tokens and trading in shares, securities, and other financial products concluding that their nature would be similar. Therefore, guidance for determining whether the trade is being conducted or not can be taken from the existing case law on trading in shares and other securities.
 
The concept of whether the activity of taxpayer amounts to a taxable trade (with the tokens as a trade receipt) or not, further elaborated regarding the “mining” and “staking” transactions and will depend on the degree of activity, its organization, risk, and commerciality as well. If such activity is not considered to be a trade, the pound sterling value (at the time of receipt) of any tokens awarded will be taxable as income (miscellaneous income) with any allowable expenses reducing the amount chargeable.  
 
Obligation to pay the Income Tax together with the National social contributions on the value of cryptoassets arises in the case where they received as “money worth” employment income. At the same time, HMRC explains its approach to the treatment of such an income as readily convertible assents (RCA). Section 702 of the Income Tax provides for cryptoassets are RCA if the trading arrangement exists or are likely to come into existence and HMRC associates this moment with the point where the cryptoasset is received as employment income. It’s an employer’s obligation to report and pay to HMRC for the tax and National Insurance contributions due on the best estimate of the value of that asset. This rule will continue to be relevant regarding the National Insurance contributions purposes even in case the exchange tokens are not treated as RCA, but in such a case employee is obliged to declare him/herself any amount received in the form of exchange tokens on Self Assessment tax return and then pay HMRC (via Self Assessment) any Income Tax liability arising on that income.

HMRC's concept of understanding of airdropped crypto taxation derives from the nature of airdrops and comes down to the following: Income Tax may not apply if airdrops are received without doing anything in return or not as part of a trade or business involving cryptoasset exchange tokens or mining.  Otherwise, they are subject to Income Tax as either miscellaneous income or receipts of an existing trade.

Determining the location of the cryptoassets is of great importance for tax purposes. It will depend on the two main factors: identifying whether there is any statutory rule regarding the subject tax and identifying whether there is an underlying asset and crypto asset is simply a digital representation of such an underlying asset.

Even though the fact that HMRC recognizes other types of cryptoasset, second section, - Cryptoassets for businesses,  deals specifically with the tax treatment of exchange tokens, for example, bitcoin and outlines the following taxes:

The type of tax will depend on who is involved in the business and the activities it carries out (including whether these activities count as a trade).

The common rule is that if the activity concerning the exchange token is not a trading activity, and is not charged to Corporation Tax in another way, then the activity will be the disposal of a capital asset and any gain that arises from the disposal would be charged to Corporation Tax as a chargeable gain. If activities are considered to be trading then profits (or losses) will form part of the trading profits instead of being a chargeable gain. Companies that account for exchange tokens as ‘intangible assets’ may be taxed under Corporation Tax rules for intangible fixed assets. Regulator specifies the rules applicable for pooling, which allows for simpler Capital Gains Tax calculations.

HMRC describes its view on the costs allowable as a deduction during the count of gains/losses from the disposal of token stressing that any costs deducted against profits for Income Tax are not allowable as a deduction for Capital Gains Tax.

The amount of tax a business must pay will depend on its income, expenditure, profits, and gains. These must be declared annually to HMRC on either:

The value of any gain or loss related to cryptoassets must be converted into pound sterling for accountancy and reporting purposes. Reasonable care needs to be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. HMRC emphasizes that the onus to keep their records for each cryptoasset transaction, to ensure the audit trail from acquisition to disposal and therefore evidence of any gains made, is on the respective individual or company.
 
If a company or an individual disposes of exchange tokens for less than their allowable costs, they will have a loss. Certain ‘allowable losses’ can be used to reduce the overall gain, but the losses must be reported to HMRC first. There are special rules for company losses when disposing of exchange tokens to a ‘connected person’. As with other types of assets, both individuals and companies can crystallize losses for exchange tokens that they still own if they become worthless or of ‘negligible value’. 
 
The HMRC Manual also considers circumstances arising out of theft, where the person would not be able to claim a loss for Capital Gains Tax or Corporation Tax, and out of losing the private key, where a person will be able to make a negligible value.

The Manual provides for the general features of cryptoassets tax treatment and declares that each case of holding and dealing with assets has to be considered from a comprehensive perspective.

For more detailed analyses and applicability of tax treatment in terms of your case, please do not hesitate to contact our company.