HMRC clarifies taxing cryptoassets

HMRC is contacting taxpayers who they believe hold cryptoassets, advising them of the potential capital gains tax (CGT) implications. Many will be unaware that simply exchanging one type of token for another is a disposal for CGT purposes.

It is estimated that more than two million people in the UK hold cryptoassets, so it’s no surprise that HMRC is concerned about lost tax revenue. Although certain transactions will be taxed as income, most are subject to CGT; HMRC is quite adamant that buying and selling cryptoassets is not akin to gambling for tax purposes. There is a CGT disposal if you:

• sell tokens (even if the proceeds are not withdrawn from the exchange);
• exchange one type of token for a different type of token;
• use tokens to pay for goods or services; or
• make a gift of your tokens to another person (unless it’s to your spouse or civil partner).

Example

An investor invests in a new token using some of their Ether tokens. The new token increases in value, so the investor converts back to Ether. Both transactions are disposals, so CGT will be due if the £12,300 annual exemption is exceeded. There may be no funds to pay this bill, but any further sale of Ether to realise cash will be another disposal – meaning more tax.

However, there is no disposal if, for example, you simply move tokens between different wallets.

Government tracking

Even though cryptoassets have a reputation for avoiding scrutiny, HMRC has more information than you might expect:

• HMRC receives, and can request, information from various crypto exchanges, with these powers extending to exchanges outside of the UK.
• The government has the ability to track cryptoasset transactions, with this data then compiled into a single database. However, there are still some ways to remain anonymous.

Remember that cryptocurrencies are not regulated and they are high risk. With a recent steep rise in cryptocurrency losses leading to personal bankruptcy, caution is advised.