Crypto assets in the UK: When is a tax return due?

Crypto assets, such as Bitcoin, Ethereum and other cryptocurrencies, have become increasingly popular in recent years as a form of investment, payment and alternative asset class. However, many crypto investors may be unaware of their tax obligations in the UK, or may find the tax rules confusing and complex.

In this blog post, we will try to provide a classification of the different types of crypto assets, how they are taxed in the UK and explain when a tax return is actually due as they are instances where you can avoid having to go through that if your profits and/or proceeds in the tax year are below certain allowances. 

What are crypto assets? 

Crypto assets are digital tokens that use cryptography to secure transactions and control the creation of new units. They are typically recorded on a distributed ledger, such as a blockchain, that is accessible to anyone on the network. Crypto assets can have different characteristics and functions, such as: 

• Exchange tokens: These are intended to be used as a method of exchange or payment, such as Bitcoin or Litecoin. They do not provide any rights or obligations to the holder, other than the ability to transfer or exchange them. 
• Utility tokens: These provide access to a current or future service or good, such as Ethereum or Filecoin. They may also have some exchange value, but their main purpose is to enable the use of a platform or network. 
• Security tokens: These provide rights and obligations similar to traditional securities, such as shares or bonds. They may entitle the holder to dividends, interest, voting rights or ownership of an underlying asset or business. 
• Stablecoins: These are designed to maintain a stable value relative to another asset, such as a fiat currency or a commodity. They may use various mechanisms to achieve this, such as backing by reserves, algorithmic adjustments or collateralisation. 

How are crypto assets taxed in the UK? 

HMRC does not consider crypto assets to be equivalent to currency or money, and therefore treats them as a traditional asset for tax purposes. In addition, HMRC considers that investing in crypto assets is not analogous to gambling (such that any profits made on investments in crypto assets would not be taxable). 

Depending on the nature and purpose of the crypto transactions, they may be subject to either Capital Gains Tax (CGT) or Income Tax (IT). The general principles are as follows: 

• Capital Gains Tax (CGT):
  This applies when an individual disposes of crypto assets that they own as a personal investment. A disposal occurs when the individual sells, exchanges, transfers or gifts their crypto assets to another person. The taxable gain is calculated by deducting the allowable costs (such as the acquisition price and transaction fees) from the disposal proceeds (such as the sale price or market value). The gain is then taxed at either 10% or 20%, depending on the individual's total income and gains for the tax year. The individual can also utilise their annual CGT allowance (£6,000 for 2024/25), which means that any gains below this threshold are tax-free. 
  
  
• Income Tax (IT):
  This applies when an individual receives crypto assets as a form of income or reward. This may include situations where the individual: 
• Mines crypto assets using their own equipment and resources. Mining is the process of validating transactions and creating new units of crypto assets on a network. The taxable income is calculated by deducting any allowable expenses (such as electricity and depreciation) from the market value of the mined crypto assets at the time of receipt. 
• Stakes crypto assets on a network. Staking is the process of locking up some crypto assets on a network to participate in its governance and security, and receiving rewards for doing so. The taxable income is calculated by deducting any allowable costs (such as transaction fees) from the market value of the staked crypto assets and rewards at the time of receipt. - Receives crypto assets from their employer as a form of remuneration or benefit. The taxable income is calculated by using the market value of the crypto assets at the time of receipt. 
• Receives crypto assets from an airdrop. An airdrop is when new units of crypto assets are distributed for free to existing or potential holders. The taxable income is calculated by using the market value of the airdropped crypto assets at the time of receipt. 

The income from crypto assets is then taxed at the individual's marginal rate of IT, which can range from 0% to 45%, depending on their total income for the tax year.

UK Tax treatment of Crypto-Assets for Businesses

HMRC published a guidance note last year (see our article) on the taxation of cryptocurrencies for individuals. They have now produced a similar document for businesses (see gov.uk website). The HMRC's approach in this policy paper is, as expected, conservative, and it stands in line with other countries’ tax treatment for cryptocurrencies. It's noteworthy however that the HMRC explicitly states that it does not consider crypto as a currency, and the policy paper is careful to use the term "crypto-asset" instead of "cryptocurrency" throughout.

Corporation Tax

Where a token/crypto-asset is being used in a trading activity, companies are to be taxed on their trading profits. Profits need to be calculated in GBP therefore all transactions need to be converted into GBP at the time of the transaction.

Where a token/crypto-asset is used in a non-trading activity, it is be treated as an investment and so any gain on disposable is to be subject to CT on chargeable gains. Some but not all costs can be allowed as a deduction when calculating the gain. Cost of mining for example is not allowed unless the mining activity is done as a trade. The calculation method is following section 104 of the TCGA 1992 i.e. using a pool per asset class but with slightly different anti-bed-and-breakfast rules (a sale is matched against the pool unless a purchase happen in the next 10 days -- and not 30 as usual). And in case of a hard fork, cost base needs to be split on a "just and reasonable" basis.

Tax treatment of cryptoassets: an update from HMRC

HMRC published this week a new policy paper on the tax treatment of crypto-assets. The previous paper was from 2014 (see our previous article on the subject) and this one goes into further details  but only concerns the individual taxpayer. The government has promised a further update for corporations at some point in the future.

In the paper HMRC defines 3 types of assets: Exchange Tokens (such as Bitcoin and most crypto-currencies and that can be used as payment rails), Utility Tokens that provide the holder with access to specific goods or services (such as those issues during an ICO) and Security Tokens which provide the holder with interest in a business (either debt or equity).

Essentially, individuals will be liable to pay either Capital Gains Tax (CGT) if investment is casual or Income Tax (IT) if they are actively involved in the trading of the cryptoassets. The paper goes into quite a lot of details and specifies many possible scenarios and their tax treatment but here are a few points that are worth noting: