Cryptocurrency Holders Get Tax Guidance by UK Revenue Agency

HMRC has issued detailed guidance on taxation obligations for holders of Bitcoin (BTC)-alike digital assets.

Her Majesty's Revenue and Customs (HMRC), the United Kingdom’s revenue agency, has published guidance on cryptocurrency taxation obligations for individuals. The document covers exchange tokens, a category of coins with characteristics similar to Bitcoin (BTC) and Litecoin (LTC). A rulebook for business tax duties will be issued soon, HMRC said on Wednesday.

HMRC follows the digital asset classification of Cryptoasset Taskforce (CATF), a body that comprises the UK Treasury, the Financial Conduct Authority (FCA), and the Bank of England. According to a recent CATF report, cryptos are not currencies or money, and they can be divided into three categories: exchange, utility, and security tokens.

Exchange coins are used as a means of exchange and investment and do not provide any rights or access to goods and services, unlike utility tokens and the securities coins. Exchange tokens also utilize distributed ledger technology (DLT), and no authority or group has control of their underpinning process.

Crypto tax treatment depends not on the cryptos own definition but their real use case, HMRC explains in the guidance.

“For utility and security tokens this guidance provides our starting principles but a different tax treatment may need to be adopted,” HMRC explains.

According to the revenue agency, buying or selling of exchange tokens by individuals is an investment activity. The term ‘trade’ used by holders when they exchange tokens does not follow the definition of trade for tax purpose, and therefore individuals should define those activities as investments, liable for capital gain tax (CGT), rather than trades, that comes under income tax obligations.

Holders can also apply for certain CGT deductions, including transaction fees. The revenue agency does not consider hack or thefts as disposals because the victims have the right to recover them. In the cases of forks, HMRC can accept disposals of newly created tokens if the exchange that the taxpayer uses recognizes the fork. HMRC allows for “pooling” the crypto assets with the aim to simplify the CGT calculation.

“Pooling applies to shares and securities of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired,” HMRC said.

“Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a ‘pool’. The consideration (in pound sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost.’”

Individuals should pay income tax and national insurance obligations if they accept cryptos as a form of payment for their employers, from mining activity or during airdrops. Holders of mined tokens, defined as a miscellaneous asset by HMRC, can apply for tax deductions by taking into account electricity bills or other similar expenses. Airdrops come under income tax obligations when received as a return for using a service. Holders of airdropped tokens accepted in a personal capacity, e.g., when doing nothing, are not obliged to pay taxes.

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