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This information is our current view of the income tax implications of common transactions involving cryptocurrency. Any reference to 'cryptocurrency' in this guidance refers to Bitcoin, or other crypto or digital currencies that have similar characteristics as Bitcoin. If you are involved in acquiring or disposing of cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances. That means that like real estate, the sale or exchange of tokens for other goods is a taxable event.
And similar to stockholders, digital currency holders are required to report capital gains and losses from cryptocurrency trades. Warren Davidson, R-Ohio, a member of the House Financial Services Committee, is one of the relatively few lawmakers pushing for blockchain legislation that includes changes in the tax code. He and his co-sponsors introduced a bill earlier this year to exempt cryptocurrencies from federal securities laws that apply to traditional equities.
The cryptocurrency tax issue has gained more attention recently in light of Facebook's proposed digital currency Libra. If an individual held tokens of the cryptoasset on the original blockchain they will, usually, hold an equal numbers of tokens on both blockchains after the fork. The value of the new cryptoassets is derived from the original cryptoassets already held by the individual.
This means that section 43 Taxation of Capital Gains Act will apply. After the fork the new cryptoassets need to go into their own pool. Any allowable costs for pooling of the original cryptoassets are split between the pool for the:. If an individual holds cryptoassets through an exchange, the exchange will make a choice whether to recognise the new cryptoassets created by the fork.
New cryptoassets can only be disposed of if the exchange recognises the new cryptoassets. If the exchange does not recognise the new cryptoasset it does not change the position for the blockchain, which will show an individual as owning units of the new cryptoasset. HMRC will consider cases of difficulty as they arise. Costs must be split on a just and reasonable basis under section 52 4 Taxation of Capital Gains Act HMRC does not prescribe any particular apportionment method.
HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable. An airdrop is when an individual receives an allocation of tokens or other cryptoassets. For example, tokens are given as part of a marketing or advertising campaign.
The airdropped cryptoasset, typically, has its own infrastructure which may include a smart contract, blockchain or other form of DLT that operates independently of the infrastructure for an existing cryptoasset. The tokens of the airdropped cryptoasset will need to go into their own pool unless the recipient already holds tokens of that cryptoasset, in which case the airdropped tokens will go into the existing pool. The value of the airdropped cryptoasset does not derive from an existing cryptoasset held by the individual, so section 43 Taxation of Capital Gains Act does not apply.
If an individual disposes of cryptoassets for less than their allowable costs, they will have a loss. A negligible value claim treats the cryptoassets as being disposed of and re-acquired at an amount stated in the claim.
As cryptoassets are pooled, the negligible value claim needs to be made in respect of the whole pool, not the individual tokens. The disposal produces a loss that needs to be reported to HMRC. Negligible value claims can be made to HMRC at the same time as reporting the loss. If an individual misplaces their private key for example throwing away the piece of paper it is printed on , they will not be able to access the cryptoasset.
The private key still exists as part of the cryptography, albeit it is not known to the owner any more. Similarly the cryptoassets will still exist in the distributed ledger. This means that misplacing the key does not count as a disposal for Capital Gains Tax purposes. If it can be shown there is no prospect of recovering the private key or accessing the cryptoassets held in the corresponding wallet, a negligible value claim could be made. If HMRC accepts the negligible value claim, the individual will be treated as having disposed of and re-acquiring the cryptoassets they cannot access so that they can crystallise a loss.
HMRC does not consider theft to be a disposal, as the individual still owns the assets and has a right to recover them. This means victims of theft cannot claim a loss for Capital Gains Tax. Those who pay for and receive cryptoassets, may be able to make a negligible value claim to HMRC if they turn out to be worthless. Cryptoassets are RCAs if trading arrangements exist, or are likely to come into existence, in accordance with section of the Income Tax Earnings and Pensions Act Exchange tokens like bitcoin can be exchanged on one or more token exchanges in order to obtain an amount of money.
If an employer cannot deduct the full amount of Income Tax due from employment income they must still account to HMRC for the balance. The individual must declare and pay HMRC the Income Tax due on any amount of employment income received in the form of cryptoassets using the employment pages of a Self Assessment return. More information on filing a Self Assessment tax return is available. Any disposal of the cryptoasset received through employment may result in a chargeable gain for Capital Gains Tax.
Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include:. Many cryptoassets such as bitcoin are traded on exchanges which do not use pound sterling, so the value of any gain or loss must be converted into pound sterling on the Self Assessment tax return.
If the transaction does not have a pound sterling value for example if bitcoin is exchanged for ripple an appropriate exchange rate must be established in order to convert the transaction to pound sterling. Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology.
They should also keep records of the valuation methodology. HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme.
Utility tokens Utility tokens provide the holder with access to particular goods or services on a platform usually using DLT. Security tokens Security tokens may provide the holder with particular interests in a business, for example in the nature of debt due by the business or a share of profits in the business.
Which taxes apply In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases. Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from: their employer as a form of non-cash payment mining , transaction confirmation or airdrops As set out in more detail below, there may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and will therefore have taxable trading profits.
HMRC does not consider the buying and selling of cryptoassets to be the same as gambling. The location of exchange tokens This section is primarily for non-domiciled individuals calculating their tax liability on the remittance basis and for related Inheritance Tax purposes.
Determining the location of exchange tokens When considering the location of an intangible asset, the courts will generally look at the nature of the asset to find a suitable comparison. Whether such activity amounts to a taxable trade with the cryptoassets as trade receipts depends on a range of factors such as: degree of activity organisation risk commerciality If the mining activity does not amount to a trade, the pound sterling value at the time of receipt of any cryptoassets awarded for successful mining will be taxable as income miscellaneous income with any appropriate expenses reducing the amount chargeable.