How is your Country’s Tax Authority Treating Crypto Assets? A Case in Point with the UK Tax Authorities

HRMC New Guidance on Cryptos, and how other tax authorities may follow suit

The Financial Conduct Authority (FCA) recently reported that some 2.3m UK adult residents held cryptoassets in 2021. This was an increase of 21%, or around 400,000 people, compared to 2020. It’s clear that crypto continues to grow. Therefore, HMRC felt it important to update current tax guidance on crypto assets, especially in light of the lack of current regulation from UK financial regulators such as FCA (among others).

What is the Guidance from 2021?

HMRC published a Crypto-Assets Manual in March last year. The document set out taxation issues for both individuals and businesses concerning their held cryptoassets. This was designed to update and replace the two previous policy documents released in late 2018 and late 2019.

With three documents published in a little over three years, already we see how rapidly crypto-assets and associated markets are updating and evolving.

What is in the latest guidance document?

• Its main function is to issue updated guidance for taxpayers, professional advisors, and traders to understand how HMRC interprets UK tax law, and how taxes are applied
• It clarifies and enhances past advice, including strengthening advice of tax consequences of crypto-asset transactions
• It does not change anything of significance from the past papers, or fundamentally change that perception

Cryptoassets are unique and though often taxed in the same way (standard income tax, corporation tax chargeable gains, capital gains tax). Therefore, it’s important that traders understand the taxation implications of such trades.

Why is HMRC Doing This Now?

The situation it is not always as straightforward as one might initially believe. How cryptoassets are taxed is potentially far more complex as the wording and terminology used with such tokens, coins, their trade, and transactions are subject to many variables.

An example of this is so-called “staking.” This is when cryptoassets are used to confirm transactions or applied to a blockchain’s support network. The guidance states that whether it is considered taxable trade depends on a variety of factors:

• Organisation
• Risk
• Commerciality
• Degree of activity

HMRC is trying to keep up with how quickly the markets change, considering both the chargeable assets, and their associated markets.

Special Note on Residence

The manual states that exchange tokens (the actual cryptocurrency being traded) are considered, for the purpose of taxation, as located in the country where the beneficial owner has their official residence. That means HMRC considers that if you are resident for tax purposes according to the statutory residence test, then the assets are subject to tax (subject to other variables stated above). However, this is not universal. Some professional journals have offered further guidance which they have also made available to HMRC.

What Else Does the Guidance Cover?

Furthermore, the HMRC report offers guidance for so-called derivatives. This is where businesses make it possible for other businesses, and individuals, to access crypto-asset movements. An asset’s performance is based on price fluctuations of the asset.

Quoting HMRC guidance states that “a derivative is typically very different” to when an individual or company holds an actual cryptoasset. Such derivatives “give rise to contractual rights and obligations” when two parties enter into such a contract. Therefore, “where a crypto-asset derivative has been entered into the guidance in this manual will not generally apply.”

A Timely Guidance Update

The new Cryptoassets Manual from HMRC acknowledges the continued growth of crypto. As time goes on, not only does the amount of crypto increase, but so does its complexity. It is expected that more HMRC guidance will follow. In closing, the organisation states that their views may alter to fit the sector’s evolution. Traders and companies enabling trade should expect further guidance, amendments, and supplementary guidance to cover new areas. On a final note: this is HMRC’s current interpretation and may be subject to legal challenge by UK government.