There is currently no such thing as a ‘crypto tax’ in that no legislation explicitly considers the tax treatment of cryptoassets (except for the regulations that add ‘designated cryptoassets’ to the investment transaction list for the purposes of the investment manager exemption in connection with non-residents trading in the UK). This does not mean that tax does not apply to these intangible (and mysterious) assets. Existing tax laws and principles apply to cryptoassets in the same way as they do to other assets. 

HMRC first published guidance as early as 2014. The current guidance can be found in the Cryptoasset Manual and this guidance is the focus of this article. When filing returns, it is sensible to consider HMRC’s position. While the guidance is perhaps the most detailed from any tax administration, it does not cover all circumstances. Therefore, in this article we will stick to the basics and will not cover more complex topics, such as airdrops or forks.

A few aspects apply equally to both individuals and businesses. First, HMRC does not consider cryptoassets to be money (CRYPTO10100). Any legislation referencing money does not apply to cryptoassets (for example, loan relationships). Second, the guidance focuses on ‘exchange tokens’. These are cryptoassets such as Bitcoin rather than tokens such as non-fungible tokens (NFTs) or those that are tokenised real-world assets. In this article, we will use the term ‘token’ to refer to units of cryptoassets. 

Taxation of individuals

Individuals can, in principle, be within the scope of taxation if the return on the cryptoassets is received under one of the following heads: 

• employment income;
• trading income;
• miscellaneous income; and
• perhaps most likely, a capital gain. 

Which of the above applies will depend on each individual’s facts and circumstances. 

Employment income

Cryptoassets may be taxable as employment income if received in connection with an employment relationship. National insurance contributions (NIC) may also be payable if the cryptoasset is a readily convertible asset (see CRYPTO21100)

Trading income

HMRC’s expectation, as stated in its manual at CRYPTO20050, is that it would be “unusual” for individuals to be “running a business which is carrying on a financial trade in cryptoassets”. Given this expectation, trading income is not considered further in this article. 

Miscellaneous income

Where tokens are received, which are income in nature, but where the activity undertaken falls short of trading and does not arise from an employment relationship, the income will be taxable as miscellaneous income (s688, Income Tax (Trading and Other Income) Act (ITTOIA) 2005).

In practice, the types of activity and return encountered that give rise to taxation as miscellaneous income include:

• income from mining activities. Allowable expenses may include equipment and electricity costs; and 
• ‘interest’ from crypto lending and staking activities. HMRC’s position is that such returns are not taxed as interest, because cryptoassets are not money or currency (CRYPTO61110). 

Net income is subject to income tax as miscellaneous income. Alternatively, if available, the £1,000 trading allowance can be applied to gross miscellaneous income (s783AB, ITTOIA 2005). 

Capital gains

Passive investors are often within the scope of capital gains tax (CGT). CGT commonly applies to gains or losses made on the disposal of tokens that were purchased from a third party, or on an eventual disposal of tokens that were originally received as income (and taxed as such), but which were retained as an investment. 

Cryptoassets are within the scope of the pooling (s104), same day (s105) and 30-day (s106A) rules in the Taxation of Capital Gains Act (TCGA) 1992. These rules are best known for applying to shares. The share pooling rules apply because cryptocurrency meets the definition of ‘securities’ for the purposes of this legislation, per the definition in s104(3)(ii), TCGA 1992. 

These rules apply on a crypto-to-crypto type basis. For example, the same day, 30-day and pooling rules apply to all Bitcoin holdings, even where the Bitcoin is held in separate wallets or platforms. But they separately apply to other cryptoasset holdings (eg, Ethereum and Bitcoin holdings would be considered separately).

Chargeable disposals can occur whenever tokens are disposed of, whether or not cash is received, such as when one cryptoasset is exchanged for another. A recent ICAEW TAXwire article explains other situations in which a gain may arise. 

International matters

Returns from cryptoassets are taxed in the UK using sterling values. Values must be converted into sterling using the usual conversion rules (CRYPTO40100). 

Where situs is relevant, HMRC considers that a cryptoasset that is distinct from any underlying asset should be taxed as though it is sited where the beneficial owner is resident (CRYPTO2260). Broadly speaking, this means cryptoassets held by a UK resident individual are always treated as sited in the UK for tax purposes. HMRC states that the statutory residence test should be used for this purpose. This means, for example, that HMRC’s view is that UK resident non-UK domiciled individuals taxable on the remittance basis should not be able to access the remittance basis on gains made on disposal of tokens. 

Business

The businesses section of HMRC’s manual covers all businesses, rather than being corporation tax focused. Taxation is based on the activity being conducted by the business, as it can acquire tokens in a number of different ways, such as for investment, from receipts, or mining. 

Approach to taxation

For corporation tax, HMRC’s guidance primarily considers the application of four corporation tax-charging provisions in relation to cryptoassets:

• Trading income – in line with the badges of trade, profits from cryptoassets as part of a trade or significant mining activities may be taxable (CRYPTO40150). 
• Loan relationships – cryptoassets typically fall outside loan relationship rules as they are not considered money or representative of a creditor-debtor relationship. 
• Intangible fixed assets – exchange tokens held as intangible fixed assets for accounting and corporation tax purposes must be acquired or created for use on a continuing basis in the course of the company’s activities.
• Chargeable gains – the chargeable gains rules will apply if returns are not otherwise charged to corporation tax, with specific ‘pooling rules’ for disposals and acquisitions. Different types of cryptoasset are computed separately for gains and losses.

Venture capital schemes

No specific rules apply, however schemes such as the enterprise investment scheme apply to share investments in cryptoasset-related companies if the usual conditions are met. HMRC clarifies that certain activities related to cryptoassets do not disqualify businesses from these schemes, but dealing, exchanging, brokering, or mining cryptoassets may affect eligibility (CRYPTO46000). HMRC’s advance assurance service can help determine eligibility, although it may decline to give assurance due to factual uncertainty. 

Paying employees

As noted above, for employee remuneration, income tax and NIC are due on the value of cryptoassets considered ‘money’s worth’. If the cryptoasset is a readily convertible asset, both employee and employer NIC are payable, and pay as you earn (PAYE) must be operated. If the employer is unable to recover the PAYE and employee’s NIC from cash payments made to the employee, the employee must ‘make good’ the tax paid by the employer within 90 days of the end of the tax year to avoid additional taxes (see CRYPTO42100). 

Stamp taxes

HMRC’s view is that cryptoassets are unlikely to fall within asset classes subject to stamp taxes on the transfer, but this is assessed on a case-by-case basis. Stamp duty reserve tax or stamp duty land tax (or similar rules applying in Scotland and Wales) may be relevant if cryptoassets are used to pay for property, stock or marketable securities or chargeable securities, as they are considered ‘money’s worth’. However, stamp duty does not apply if tokens are used as payment. See CRYPTO24000.

VAT

HMRC has published only limited guidance in relation to VAT. The manual states that VAT is due on the pound sterling value of goods or services paid for with exchange tokens, but not on the transfer of the token itself (CRYPTO45000). HMRC’s position is provisional, subject to EU VAT rules and cryptoasset regulation changes. Post-Brexit, the UK may diverge from EU rules, but some international alignment is expected. 

Summary

The taxation of cryptoassets continues to be a developing subject as the sector evolves. For simple activities, the subject is relatively straightforward. However, it becomes rapidly more complex once matters such as situs are considered. 

The cryptoasset manual is a start. However, it is becoming increasingly outdated as it has not been updated to reflect recent developments. Agents will need to return to first principles to determine if an event is taxable. Additional guidance from HMRC on NFTs, particularly on the VAT treatment, will be welcomed.

• Members of ICAEW’s digital assets working party who have contributed to this article include Dion Seymour (Andersen LLP), Michelle Robinson (Deloitte LLP) and Yuri Hamano (BDO LLP).

• For detailed guidance on the areas covered in this article see ICAEW’s TAXguide 01/2024: Taxation of cryptoassets for individuals and TAXguide 02/2024: Taxation of cryptoassets for businesses.