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Confusion over cryptoassets and Capital Gains Tax

With estimations of more than two million holders of cryptoassets
in the UK, many of these people might wrongly believe that their crypto transactions are tax-free. Unfortunately, this isn’t the case, as most crypto sales and exchanges are actually eligible for some level of Capital Gains Tax (CGT).

For this reason, HMRC has been sending out advisory letters to taxpayers who they believe hold cryptoassets. If you own any type of crypto token, or are interested in holding them in the future, then read on to learn more about the tax implications of buying and selling cryptoassets
in the UK.

What are cryptoassets?

Cryptoassets, or cryptocurrencies, aren’t actually a currency or valid form of money, so HMRC won’t treat them the same way. HMRC defines them as ‘cryptographically secured digital representations of value or contractual rights that can be transferred, stored, or traded electronically’. This means they’re only virtual, recorded digitally via ‘blockchains’ using Distributed Ledger Technology (DLT).

Like a regular currency, you can still buy, sell, and trade cryptoassets, and there are market-driven fluctuations in their exchange rate. HMRC categorises crypto tokens into the following groups:

  • Exchange Tokens – a means of payment (e.g. Bitcoin)
  • Utility Tokens – a means of access to goods or services
  • Security Tokens – a means of holding rights or interests
  • Stablecoins – reflective of a government-backed stable currency

The Capital Gains Tax due depends on the nature of the token and your specific use of it. If HMRC suspects you of evading or underpaying cryptoasset taxes, they can enforce financial penalties.

How does HMRC tax cryptoassets?

HMRC treats cryptoassets more like traditional assets when it comes to CGT, as they aren’t considered to be equivalent to real money. Buying and selling crypto tokens therefore isn’t considered gambling, either. Capital Gains Tax only applies if you profit from cryptoasset disposal.

The transaction counts as a CGT disposal if you sell crypto tokens, exchange one type for another, use them to pay for goods/services, or gift them to someone else (who isn’t your spouse or civil partner). If you’re only moving tokens between different virtual wallets/platforms, it isn’t a disposal.

If there is no disposal, then no CGT is due. The amount you’ve invested in cryptoassets so far is irrelevant – the only part that matters to HMRC is the profit you make when they’ve been sold or exchanged. This means you’ll only pay tax on the difference between the purchase and sale prices.

For example: an investor purchases Ethereum tokens, using some Bitcoin tokens as payment. The Ethereum tokens increase in value, so the investor exchanges them for more Bitcoin tokens. Both of these transactions count as disposals, so CGT
is due if the transactions exceed the CGT allowance.

What about taxes on NFTs?

As you’re probably aware from their recent popularity, Non-Fungible Tokens (NFTs)
are another form of cryptoasset. However, you can’t trade or exchange them for equivalent values in the same way as cryptocurrencies, so the current CGT guidance on crypto token taxes doesn’t seem to apply.

No tax authority has published legal guidance on NFTs just yet, including HMRC, but it’s likely that they’ll eventually be taxed in a similar way to their already categorized cryptoassets. Keep an eye on the online HMRC Cryptoassets Manual for updates if taxes on NFTs
in the UK are of interest to you.

When do taxes apply to cryptoassets?

In addition to paying Capital Gains Tax on profits from disposals, individuals investing in or receiving cryptoassets may also be subject to Income Tax and National Insurance Contributions (NICs) in certain circumstances. These three taxes may also apply to businesses – plus Corporation Tax, VAT, and Stamp Duties – if they buy, sell, exchange, or receive gifts of crypto tokens as a company.

In any case, cryptoassets must be declared on tax returns, so it’s important to keep permanent records of every significant crypto transaction. If you’re unsure about which taxes apply, how to plan for cryptoasset tax, or how to calculate your tax bill, why not get in touch with the team at GBAC? We offer both personal and corporate tax consultancy services from our base in Barnsley.

Click here to view the government guidance on paying Capital Gains Tax when selling cryptoassets.