Taxation of cryptoassets
Cryptoassets have dominated the headlines for a while. The FCA have also recently published a research note that estimated 2.3 million people now hold cryptoassets in the UK. Despite this increase, they also suggest that the level of understanding of cryptoassets is declining.
One of the key considerations is whether they are held for investment or trading purposes. This will impact whether they are subject to capital gains tax or income tax.
Income tax rates are currently higher than CGT rates that apply to investors.
In most cases, cryptoassets are held as investments and profits on sale are subject to capital gains tax (CGT).
Capital losses on cryptoassets can only be relieved against other capital losses, which is far more restrictive than trading losses.
Crypto traders, just like those in stocks and shares, may instead find their profits are subject to income tax if the activity amounts to a trade; this is likely characterised by frequent buying and selling.
There is a high hurdle to clear in order to meet the trading criteria and HMRC may challenge a taxpayer who reports a crypto loss as a trading loss.
HMRC have taken the view that cryptoassets are situated for tax purposes where the owner resides. Should a taxpayer take a contrary view and HMRC challenge this, the tribunals may ultimately resolve this matter.
Although often referred to as cryptocurrencies, there are not a currency. As such, the usual CGT exemption for currencies does not applies. Therefore, if you buy your Tesla with your bitcoin, you are disposing of that bitcoin and need to assess whether you have made a gain for tax purposes.
HMRC are yet to provide detailed guidance on the taxation of non-fungible tokens (NFTs). For UK tax purposes, NFTs are comparable to a contract and similar tax treatment may apply.
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This episode was recorded on 06/07/2021
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
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