This blog post aims to highlight some of the tax considerations in ‘crypto cases’. It hopefully acts as a complementary piece to the article by Ben Fearnley which provides a comprehensive overview of what cryptoassets are, how they are held and the particular issues of cryptoassets when they arise in Financial Remedy proceedings.

HMRC define cryptoassets as ‘cryptographically secured digital representations of value or contractual rights’ that can be transferred, stored or traded electronically’.1 Note here that HMRC have confirmed that derivatives contracts held over crypto assets are derivatives and are not taxed as cryptoassets.

The way that cryptoassets are taxed will depend on how the individual is using them. The tax treatment that applies will depend on the following:

• individual investor;
• investing through a company;
• individual trader.

There is no specific tax legislation covering the taxation of cryptoassets so we must follow basic tax principles.

An individual who is an investor will be subject to capital gains tax on any gains they make – much like an individual who invests in and sells properties. Individuals who are mining or staking will be subject to income tax as it is deemed that they are in the business of cryptocurrency and therefore taxed as though they are self-employed. The top rate of income tax is 45% compared with the top rate of CGT on crypto assets being 20%.

Each type of currency will have its own CGT pool, for example one individual might have a bitcoin pool, a Polkadot pool and a Cardano pool. The single biggest challenge for a tax adviser when advising on crypto assets is accessing the data required to calculate the gain. In cases where crypto is a significant asset time may need to be devoted to gathering all the relevant historical information on the values of the assets.

If an individual is mining or staking, any tokens received from this activity will be subject to income tax as this will be deemed a self-employment business.

If a company is investing in cryptoassets the gains (or profit) would be subject to corporation tax at 19% (or 25% for profits over £250,000). HMRC have said:

‘only in exceptional circumstances would HMRC expect businesses to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.’2

Allowable deductions

All types of fees are allowable as deductions. This includes exchange fees, deposit fees, trading fees and withdrawal fees.

Losses

As noted in Ben Fearnley’s post, the market capital of Bitcoin market is volatile and in August 2022 was down to 450bn USD from a high of 870bn USD last year. So what do people do with these huge losses? This depends on whether the losses are realised or not. To draw another analogy to investment properties, if a property has gone down in value since it was purchased, the property is standing at a loss, however that loss cannot be offset against a gain until the property is sold.

If the losses are not realised then the individual cannot claim any losses. If the individual sells the Bitcoin the loss will have been realised and then can be offset against future gains.

Illustration – Mr Gregg

Mr Gregg bought Bitcoin for £300,000 in 2021. £300,000 is his base cost. In 2022 the value of his Bitcoin fell to £100,000. Mr Gregg has an unrealised loss of £200,000. He cannot ‘do’ anything with this loss. If Mr Gregg sells his Bitcoin in 2023 for say £305,000 his gain is £5,000. To work out the gain we look at the sale price less the base cost (which is usually the purchase price).

If in 2022 Mr Gregg sells the Bitcoin for £100,000 he will have a realised capital loss of £200,000. Mr Gregg can use this loss to offset other gains. Losses can be used in the tax year they have been incurred or they can be carried forward to offset against future gains. The losses cannot be carried back to earlier tax years (carry back of losses is only allowable on death).

If in 2022 Mr Gregg also sells a property which has a gain of £150,000, ordinarily this would incur capital gains tax of £42,000 (being 28% of £150,000). However, Mr Gregg could offset the loss against the gain – reducing the tax payable to nil. He would then have capital losses left of £50,000 to carry forward.

The position of a loss in the case of an exchange going out of business are slightly less clear. Parallels can be drawn to shares losing their value. A loss can only be claimed if the individual files a negligible value claim with HMRC. For shares there is a public list of shares for which a NVC can be filed but no such mechanism currently exists for cryptoassets. A loss due to losing a private key would not be suitable loss for capital gains tax as no loss has actually been realised.

Taxing crypto gains is simpler than accounting for crypto losses. Most of the time the tax that is payable will be capital gains tax, however, if the individual is trading in crypto or mining or staking, the money they make from doing this will be subject to income tax.

HMRC’s most recent guidance on the taxation of cryptoassets is based on their policy papers from 2018 and 2019. Given the pace of development in digital currency these urgently require updating therefore specialist advice in this area is required.