Only a few weeks after the United States Internal Revenue Service published new guidance for crypto taxation, the United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs, has updated its cryptocurrency taxation policy paper for businesses and individuals.
The HMRC’s approach in this policy paper is, as expected, conservative, and it stands in line with other countries’ tax treatment for cryptocurrencies. The HMRC explicitly states that it does not consider crypto as a currency, and the policy paper uses the term “cryptoassets” and not cryptocurrency.
The policy paper on individuals considers crypto activity as a personal investment subject to capital gains tax that should be paid when crypto is sold for fiat, using crypto to pay for goods or services, gifting crypto or — unlike the position of the French tax authority — exchanging crypto for crypto.
Capital gains tax is commonly used to tax crypto activity in many countries, such as the U.S. and Israel. However, while other countries are struggling to draw the line between personal activity and professional trading, the HMRC states that crypto would fall into the definition of business activity “only in exceptional circumstances,” continuing:
“HMRC expects individuals to buy and sell cryptoassests with such frequency, level of organization and sophistication that the activity amounts to a financial trade in itself.”
The policy paper states that an employee’s salary and mining activity are subject to income tax.
Mining activity by individuals can also be classified as a business activity. The HMRC will review several factors to decide on the classification, such as degree of activity, organization, risk and commerciality.
If the mining activity does not amount to a trade, any crypto awarded for successful mining — or any other mining fee — will be taxable as income. If it falls under the classification of business activity, then corporate tax and a value-added tax may be due. In cases where the individual did not sell immediately and was awarded crypto, they will be subject to capital gains tax when that crypto is sold or exchanged.
Airdrops can be treated as capital gains or as income tax, depending on the circumstances. If the airdrops are being given in the event of a chain split or in any other case that does not constitute a payment for providing a service or business activity, it will be treated as capital gains tax. If it is related to any service or other conditions, it will be taxed as income.
If you are paying income tax on crypto activities, you may also offset your losses from trades against future profits or other income.
It seems as if someone in the HMRC understands the tax ramifications of the volatile crypto market. The policy paper attempts to prevent crypto trades that use the volatile market to manipulate the taxes due. The paper has a specific rule for crypto acquired within 30 days of selling. This rule will apply if an individual acquires tokens and sells or exchanges them within 30 days of the disposal of the same token type. Those who will buy and sell the same tokens will not be subjected to capital loss up to the amount of the new tokens purchase on those dates.
The HMRC’s conservative approach also applies to business activity. Crypto companies will not find crypto-friendly tax benefits under Her Majesty’s policy.
U.K.-based crypto companies are subject to corporation tax on their profits and gains. Any goods or services sold in exchange for crypto tokens are subject to VAT.
With that being said, the HMRC decided that under the Value Added Tax Act 1994, financial services supplied by crypto exchanges or any services required to exchange tokens are exempt from VAT.
Companies paying salaries in crypto are subject to income tax and national insurance contributions on the value of the asset.
The U.K.’s “stamp duty reserve tax” is charged on stocks and securities. The HMRC does not consider crypto as a stock or security, and therefore, there will be no stamp duty reserve tax on crypto business activity in the U.K.
Without a doubt, 2019 will be marked as the year of crypto tax guidance. After 11 years of Bitcoin’s existence, countries around the world are creating clarity for taxpayers regarding crypto activity. Will 2020 be the year that finally shows a significant increase in tax filings? Only time will tell.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of CryptoX.
Or Lokay Cohen is the vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation, managing a leading tax consultant firm. She holds a LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging the gap between cryptocurrency and the taxation reality to enable tax reporting under a clear, regulatory framework and specific identification methods.
