Cryptoassets guide for individuals
HMRC does not consider buying and selling cryptoassets/cryptocurrencies to be gambling. So, gains made following the disposal of tokens may be subject to UK tax. To determine which tax applies, there will need to be a distinction between trading or capital appreciation.
Capital Gains Tax
Tokens that are held for investment purposes are subject to capital gains tax. This treatment will apply to most individuals who own cryptoassets. A capital gains annual exemption is available so that only gains exceeding the allowance are subject to tax. The CGT annual exemption for the 2021/22 tax year is £12,300.
A disposal takes place where tokens are sold, exchanged, used to pay for goods or services, or gifted to someone other than a spouse. There is no disposal where the tokens move between wallets.
When tokens are sold the gain can be reduced by amount paid for the tokens and the transaction fee. Where the transaction fee is satisfied in tokens there is a separate disposal of the tokens to cover the fee and a taxable gain is likely to arise.
The normal share matching rules apply to cryptoasset tokens. The acquisition costs of tokens are pooled so that each token in the pool will have a base cost equal to the average cost of the tokens.
If an individual disposes of tokens, they are deemed to have sold any tokens acquired in the following order:
- on the same day
- in the following 30 days
- or from the pool.
Different pools are required for different cryptoassets.
Income Tax
If tokens are bought and sold with such frequency that the activity is trading, gains and losses will be subject to income tax and National Insurance (NI) contributions.
Trade losses may qualify for sideways loss relief. They can be offset against general income or capital gains in the current or previous tax year.
Earnings
Individuals will be liable to income tax and NI contributions if they receive cryptoassets from an employer as a form of non-cash payment.
Mining, transaction confirmations, and airdrops
Not all cryptoassets transactions involve buying and selling tokens. Individuals generate new tokens by mining; verify cryptoassets transactions; and receive airdropped tokens as part of a marketing or advertising campaign.
Token or fees awarded are subject to income tax. Airdropped tokens awarded not as part of a trade are not subject to income tax.
If the activity does not amount to a trade, the pound sterling value at the time the tokens or fees are awarded will be taxable as miscellaneous income.
Where profits are taxable as miscellaneous income, any net losses in a year may be carried forward to offset against future gains.
Equipment and electricity costs incurred for mining are not allowable costs when calculating trade profits because they are not incurred wholly and exclusively to acquire the tokens. However, it may be possible to deduct some of these costs against trade profits.
Record Keeping
The taxpayer is required to keep records for each cryptoasset transaction. HMRC guidance confirms the information that should be recorded is as follows:
- the type of cryptoasset
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in pound sterling (as at the date of the transaction)
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review
Inheritance Tax
Cryptoassets are chargeable property for inheritance tax purposes. The location of the tokens may need to be determined for individuals who are non-UK domiciled.
