Tax treatment of cryptoassets: an update from HMRC

HMRC published this week a new policy paper on the tax treatment of crypto-assets. The previous paper was from 2014 (see our previous article on the subject) and this one goes into further details but only concerns the individual taxpayer. The government has promised a further update for corporations at some point in the future.

In the paper HMRC defines 3 types of assets: Exchange Tokens (such as Bitcoin and most crypto-currencies and that can be used as payment rails), Utility Tokens that provide the holder with access to specific goods or services (such as those issues during an ICO) and Security Tokens which provide the holder with interest in a business (either debt or equity).

Essentially, individuals will be liable to pay either Capital Gains Tax (CGT) if investment is casual or Income Tax (IT) if they are actively involved in the trading of the cryptoassets. The paper goes into quite a lot of details and specifies many possible scenarios and their tax treatment but here are a few points that are worth noting:

• If a cryptoasset is provided in connection with employment, Class 1 will be due just like with any emolument. It is also noted that mining income is subject to income tax but also national insurance just like any sole trader income.
• Losing a private key does not count as a disposal for Capital Gains Tax purposes. However if it can be shown that there is no prospect of recovering the private key, a negligible value claim could potentially be made. Similarly if an asset becomes 'worthless' one might be able to make a negligible value claim as well.
• Being victim of a fraud or theft also does not constitute a disposal since there is no change of ownership.
• Cryptoassets are not considered a currency so they cannot be used to make a tax relievable contribution to a registered pension scheme.
• Cryptoassets are considered property for the purposes of Inheritance Tax.

You can read the paper in full at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals