UK Released New Tax Guidance, Both Income and Capital Gains Taxes Apply To Trades

Colin Muller

The UK tax authority, Her Majesty's Revenue and Customs (HMRC), has today released new guidance on how cryptoassets will be taxed by the British Government. Traders and investors in digital assets stand to be taxed both with Income and Capital Gains tax.

Three types of digital assets are specified by the release, those being exchange tokens, utility tokens, and security tokens. Only the taxation of the first category - exchange - is described, although the release notes that “this guidance provides our starting principles [for the other categories] but a different tax treatment may need to be adopted.”

Income Tax Versus Capital Gains

In the vast majority of cases, according to the release, those handling cryptoassets will only have to deal with Capital Gains tax when “disposing” of their cryptoassets. Losing one’s private keys, the document notes, does not count as disposal.

However, the scope for what constitutes disposal is worryingly large. Selling digital assets for either fiat currency, but also for “a different type of cryptoasset” - something that occurs very frequently on cryptoasset exchanges - are cases of disposal. Paying for a good or service with a digital asset is also considered disposal, as is “giving away cryptoassets to another person.”

Income Tax is generally applied to profits made from trades, and “Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself,” and therefore fall under an additional Capital Gains requirement.

Mining of cryptocurrencies constitutes a taxable activity, and if rewarded assets are quickly sold then Income Tax applies; however, “[i]f the individual keeps the awarded assets,” Capital Gains taxes may apply at time of disposal. Airdopped tokens are another matter, and are not taxable as Income Tax, unless “provided in return for, or in expectation of” miscellaneous income or receipts of existing trade.

Pools

One important structural takeaway is that each cryptoasset shall constitute a single “pool.” Instead of taxing gains on each individual trade, taxes are levied on entire pools of one asset (that is, every single different cryptoasset no matter how similar) whenever a portion of that asset is disposed of. Every pound sterling spent on adding to one type of pool as added to the “consideration,” or the total amount of pounds originally paid for an entire asset pool.

Calculations regarding the Income Tax levied only, therefore, apply when assets are sold out of the entire pool. The exception to this is if tokens of an asset were sold within 30 days of re-acquiring the same asset. Forked assets create their own, new pools.

Gambling

Perhaps the most controversial statement in the document is HMRC’s view that it “does not consider the buying and selling of cryptoassets to be the same as gambling.” Others, no doubt, disagree.