Thorough crypto tax guidelines have been published in the United Kingdom by the nation’s tax agency, Her Majesty’s Revenue and Customs (HMRC).
Published on 19 December, the comprehensive guide details the circumstances or instances in which a crypto holder, trader or someone who receives payment in the form of crypto would need to pay taxes. At present, the HMRC report refers only to individuals. Tax guidelines for crypto assets in businesses or utilized by businesses are due to be published at some point in the future; HMRC also notes that the “tax policy may evolve as the sector develops”.
The framework set out by the HMRC is lengthy with many nuances and sub-sections throughout which provide provisions for hard forks, losses and so on, there are some key takeaways that indicate that the UK is beginning to formally adopt cryptocurrencies into the national economy and pave the way for crypto legitimacy.
The move builds on the work laid out by the UK’s Cryptoasset Taskforce (CATF), an entity comprised of the UK Treasury and the Financial Conduct Authority (FCA), who in a bid to regulate the nascent sector have optimistically endeavored to examine and study cryptocurrencies and blockchain technology.
What is taxable?
The CATF had previously split cryptocurrencies into three camps: security tokens, utility tokens, and exchange tokens. Though these taxation guidelines only apply to exchange tokens, the HMRC writes: “This paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens. For utility and security tokens this guidance provides our starting principles but a different tax treatment may need to be adopted.”
In brief, the HMRC outlines that crypto holders need to pay capital gains tax when they have purchased tokens in an attempt to make gains on their investments. Additionally, those who receive payment from their employers in the form of tokens which are classified as “readily convertible assets”, meaning they can easily be exchanged for cash, will be required to pay income tax, though there are nuances on when the employer pays tax on the employee’s behalf, and vice versa.
Amongst the numerous recordkeeping requirements where a user is required to detail token type, date received, the number of tokens and so on, the HMRC offers a “pooling” option for crypto tokens which allows for simplified capital gains tax calculations, which removes the need to monitor each individual loss or gain transaction.
HMRC writes: “For example, if a person owns Bitcoin, Ether, and Litecoin they would have three pools and each one would have its own “pooled allowable cost” associated with it. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.”
Mining and airdrops have also received the tax treatment. For miners, “if the activity does not amount to a trade”, then the awarded amount is taxable as miscellaneous income with reductions available based upon mining expenses. Furthermore, mining fees are also subject to income tax as either “trading or miscellaneous income”, which depends on a few factors with regard to the activity, namely: degree of activity, organization, risk, and commerciality.
For airdrops, “income tax will not always apply” if tokens were received “without doing anything in return” or are “not as part of a trade or business involving cryptoassets or mining”. However, if airdropped tokens were received in return for, “or in expectation of”, a service, then income tax applies.
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