It’s doubtless that you’ll have heard about cryptocurrency and its potential for the future of the financial industry.
But have you been told what the difference between utility tokens, security tokens and exchange tokens are? Or have you been made aware of the stance that HMRC has on the crypto assets?
Recently published guidelines have clarified the governments’ definition of digital currencies as well as the rules for taxation, which is something everybody interested in crypto assets should understand.
First, an overview of the three types of crypto asset:
• Exchange Token – A digital version of cash, used to buy services or products online. Bitcoin is one example.
• Utility Token – Something a platform will give out to users for a small fee (compared to an exchange token), to buy or sell using their brand of crypto asset.
• Security Token – Similar to a utility token, but it represents a share in the company that issued it, similar to the way shares are traded on the stock market for partial ownership in a company.
Taxation for individuals
When looking at crypto asset investments, HMRC will make an assessment on how much tax may be owed on a case-by-case basis.
The government used to allow some forms of earnings to be exempt from taxation, where profits were from highly speculative practices. This was similar to how HMRC don’t tax betting wins, but it’s no longer the case, meaning that almost every profit will be open to scrutiny.
Their guidelines state that the government doesn’t view crypto assets as money or currency, but rather something to be invested in, meaning you’ll be liable to pay capital gains tax as with any investment profits.
This may be tricky for HMRC to manage due to the fluctuating value of crypto assets – think of the boom in the value of bitcoin and most other cryptocurrencies in 2017.
So, it’s critical to keep track of the market value of a crypto asset at the point you buy or sell, so you pay the correct amount of tax whether the value dips or spikes.
Crypto mining and tax
Mining for crypto assets involves solving complex mathematical problems using a huge amount of processing power, which is difficult and costly.
Earning money this way was once tax-free, but it’s now subject to income tax as a ‘miscellaneous income’, meaning that the amount of money earned will be looked at and taxed at the same rate in Pounds Sterling.
The 2019/20 income tax rates in England, Wales and N. Ireland:
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,500||0%|
|Basic rate||£12,501 to £50,000||20%|
|Higher rate||£50,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
Taxation for businesses
Some businesses – particularly those in the financial industry – might pay their employees in Utility Tokens. But the HMRC says that something given to somebody in return for their services is a form of payment, and is therefore subject to taxation.
So, if you run a company and are thinking of doing the same, these crypto asset payments as a different form of salary will still be subject to income tax for employees, and National Insurance contributions for the both of you.
Capital gains tax
The HMRC view cryptocurrencies in the same way as they do foreign currencies – they’re chargeable assets for Capital Gains tax purposes.
The capital gain or loss calculated on the difference between the sterling value when you sell, and the value at acquisition.
Gains can be part of your tax-free allowance of £12,500, just like the rules stipulate for people being paid with Pound Sterling.
But for any gains you make within the basic Income Tax band, you’ll pay 10% capital gains tax while having to pay 20% on any amount above the basic tax rate.
Corporation tax rules that apply to every business in the UK, will also apply in the same way when businesses decide to trade, exchange and save crypto assets.
Profits from investments will be subject to corporation tax in the same way as any other trading activity, and losses may be:
• Offset against the company’s total profits in the same accounting period
• Relieved against the company’s profits for the previous accounting period
• Carried forward and offset against the company’s profits from the same trade in any future accounting periods
HMRC’s guidance on VAT and crypto assets hasn’t been updated since 2014, but it’s quite simple: if your business is VAT registered and you receive crypto assets as payment for goods and services, the VAT due will be the Sterling value of the crypto at the time of the transaction.
The bottom line
HMRC is keeping an extremely close eye on the development of crypto assets and closing down any loopholes. But big opportunities still exist.
The marketplace is developing rapidly and with the right amount of research and guidance from experts, you could still see strong returns without breaking any rules.
The key thing is to keep a solid record of everything you buy and sell. And if in doubt, always ask a tax specialist.