Chapter 4

Crypto Tax Scenarios

Buying and Selling Cryptoassets (Including Stablecoins)

There are no taxes on buying crypto in the UK if you just buy it and hold it forever. You should always keep records of the transactions if you need to prove where you got the funds from or if you want to sell them in the future.

When you decide to sell crypto to fiat, you will have to pay capital taxes on the gains you create with the asset's sale. Every cryptocurrency is seen as a separate Capital Gains Tax Asset.

When you trade crypto to crypto you also have to pay Capital Gains Tax on the Gains created in the trade. It is seen as if you would sell it to GBP and convert it to the new cryptocurrency asset. The same rules apply to trades between your crypto assets and stablecoins.

Financial Trading in Cryptoassets (Trading as a Business)

Are you using your cryptoassets to trade? Then, the HMRC will require you to pay income tax on your trading profits. However, this will depend on the frequency and intensity of trading activities you're doing. You can either be liable for an income tax or a capital gains tax from crypto financial trading.

Individuals who use cryptoassets to trade frequently with a high level of intensity, sophistication, and organisation are deemed to be doing an activity that already amounts to a financial trade in itself. Thus, the financial trading activity would be considered a business; hence, the need to pay income tax on profits gained from it.

Meanwhile, individuals who practise trading activities in a lesser frequency and intensity through simpler means will become liable for capital gains tax instead. HMRC deems that these people trade their cryptoassets almost recreationally. Hence, the activity doesn't constitute a trading business by nature and is therefore not liable for income tax but for Capital Gains Tax (see more in section Capital Gains Tax).

Now, how would you know if your trading activity is already comparable to a business, making you liable for an income tax on cryptoasset trading profits? It all boils down to a question of fact. HMRC acknowledges that individuals who trade as frequently and intensely as a business do happen only in exceptional circumstances. You'd see if you're often trading cryptoassets similarly as you would trade in securities, shares, and similar other assets.

If you need further guidance, HMRC's Business Income Manual (BIM56800) can help determine if your trading activities are hinging to a business-like level.

Mining

Mining is the process of verifying blockchain ledger additions by solving complex mathematical problems using your computers. Cryptoassets are generated and given to miners as a reward for their mining work.

Now, mining activities can either be a hobby or a full-fledged business. Mining can amount to a taxable trade depending on the following factors as declared by HMRC:

  • Mining risk

  • Organisation of activity

  • Degree of mining activity

  • Commerciality

Taxing Mining as a Hobby

Cryptoassets awarded as a result of mining as a hobby will have its values evaluated in pound sterling at the time of receipt. The value shall then be taxed under miscellaneous income. The amount chargeable can be reduced depending on the expenses from the miscellaneous income if any.

Also, remember that your cryptos gained from mining as a hobby will be subjected to capital gains tax once you dispose of them.

Taxing Mining as a Business

If the HMRC determines that your mining activities constitute a business, your mining income shall be added to trading profits and filed under income tax. Fees or rewards collected from mining shall likewise be added to your taxable income. Note that all these are again dependent on mining risk, organisation, degree, and commerciality of mining activities.

Should you dispose of the cryptoassets taken from mining as a business, you should add to your trading profits any gains in crypto market value from the time you acquired the tokens. You also need to pay for the National Insurance Contribution.

Airdrops

Airdrops are free tokens or coins given to numerous wallet addresses. These free cryptoassets are often a part of a marketing campaign from specific organisations. Some airdrops are also automatically given to individuals due to registering for an airdrop campaign or for holding particular kinds of cryptoassets in his wallet.

Income tax is often applied to airdrops. However, airdrops may be exempted from income tax on two conditions:

  • The airdropped cryptos are received without doing anything in return (not related to any conditions or any other services)

  • The cryptoassets are not a part of businesses or trade that involves cryptos and mining

Income tax shall be collected on airdrops received in return for a service. For individuals, it will be classified under miscellaneous income. It shall also be subjected to capital gains tax upon disposal of the airdrop cryptoassets. Meanwhile, businesses that received airdrops in return for services shall pay income tax and may declare them under trading profits as well. Crypto businesses are also required to pay for National Insurance Contribution too.

Pooling can also be applied to airdrops. Airdropped tokens of which the receiver already has existing tokens shall be pooled together with the existing cryptoasset pool. Meanwhile, airdropped tokens will go into its pool if the holder doesn't have any current cryptos of the same type.

Tax on Hard- and Soft-forks

Blockchain forks are splits in the blockchain network. It may be due to situations wherein two or more blocks have similar block heights, misalignment in blockchain software from different miners, or an outright modification of existing blockchain code to create changes and new cryptos.

The two types of forking are known as hard forks and soft forks. Hard forks are meant to create new cryptoassets from changes in the main blockchain code. On the other hand, soft forks are meant only to update the protocol for everyone to adopt. New tokens or blockchain networks are not created in soft forks.

Now, HMRC imposes Section 43 Taxation of Capital Gains Act 1992 on taxing blockchain forks, most especially for hard forks with newly-minted cryptoassets. This means that your new cryptoassets' value shall be taken from the cryptoassets you already hold before the fork.

If you hold new cryptos due to forking, your cryptoassets should now be divided into two: an original cryptoassets pool and a new cryptos pool. Allowable costs for pooling of your original cryptos will be split between these two pools. Crypto received from a Hard-fork is not subject to income tax.

Now, if your cryptos are held through an exchange, it is the exchange's responsibility to choose if it will recognise the new cryptos emerging from the fork. Note that you cannot dispose of your new cryptos if your exchange does not recognise them. If this happens, HMRC will deem that you own units of the cryptoasset arising from the fork.

As for apportionment, HMRC does not particularly prescribe any method for cryptos arising from forks. HMRC can enquire into apportionment methods used if it is seen as unreasonable. Also, HMRC can look into cases depending on their difficulty, as forking can be quite complex in taxation.

Tax on cryptocurrency Margin Trading

The tax classification for Futures, CFDs (Contract for Difference), and margin trading as far as cryptocurrency is concerned has no clear guidelines from HRMC.

As a financial trader, gains are added to his/her trading profits and is subject to income tax. When the individual is not a financial trader, HMRC has not defined if the gains and losses should be considered as CGT or added to miscelaneous income and should be added to the individual's income tax.

Tax on Gifts

When you gift cryptocurrency to anyone (except your spouse or civil partner), you will have to find out what the market value of the crypto is on the date that you gifted it in sterling pound (Fiat). This gift will be considered as sales proceeds in the Capital Gains Tax field.

If the gifted tokens' value has already been charged with income tax, the sales proceeds will be reduced according to section 37: Taxation of the Capital Gains Tax Act 1992, which basically means that the sale of the token will be subjected to the Capital Gains Tax with a reduced Income Tax.

Tax on Crypto Donations

An individual is entitled to Income Tax Relief if they donate crypto to a charity. They might also be exempt to Capital Gains Tax except for the following cases:

  1. If the individual sells the crypto asset to the charity at a cost (and is higher than the acquisition cost), he/she will have to pay Capital Gains Tax on the difference between the selling price and the acquisition cost.

  2. If the individual makes an arrangement with a charity to get a financial advantage or kickback. This donation is also called a "tainted donation."

Cryptoassets Received as Earnings

Cryptoassets may be used to provide income for employees instead of the traditional fiat money. As such, all cryptos received as employment income are subject to income tax. The receiver is also required to pay National Insurance Contributions in proportion to the assets' price value.

Now, there are three situations under cryptos received as earnings:

Readily Convertible Assets (RCAs)

Readily Convertible Assets (RCA) is a term used to define cryptoassets that are given under existing trading arrangements. RCAs exist per section 702 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003).

Trading arrangements often already exist or are likely to live during the time cryptos as received as income. This is because cryptocurrency exchanges often facilitate easy exchange from one crypto token to fiat money.

Employers with a UK tax presence should deduct the due amounts for income tax and Class 1 National Insurance contributions through PAYE's operations. They should remit these deductions to HMRC in the best possible estimate value from crypto to pound sterling.

Meanwhile, employers who, for some reason, cannot deduct the income tax amount from the income are still accountable to HMRC for the due amount. The expected amount should be reimbursed to HMRC within 90 days after the tax year ends. Failure to comply will mean additional charges for income tax and National Insurance contributions, as stipulated under section 222 ITEPA 2003.

Cryptos that aren't RCAs

Income tax and National Insurance contributions will still be collected from crypto payments that aren't part of the RCAs. The individual should declare this income on his Self Assessment tax return. Meanwhile, the employer needs to pay any Class 1A National Insurance contributions since non-RCA cryptos issued to an employee are classified as payments in kind under the National Insurance contributions perspective.

Third-party Providers of Cryptos in Connection to Employment

Third parties are allowed to provide cryptos as a form of payment in connection to employment. Hence, income tax should be collected on these cryptoassets as stipulated in Part 7A ITEPA 2003. Meanwhile, National Insurance contributions will also be collected under Social Security (contributions) Regulations 2001. It is the third-party provider's responsibility to remit all dues to the HMRC through PAYE's operation.