Yesterday (30 March) HMRC published its new Cryptoassets Manual. This essentially retires HMRC's two policy papers covering tax for individuals and businesses on cryptoassets. We can confirm the new cryptoassets manual does not depart from HMRC's position in the policy papers.
An HMRC spokesperson said in a statement shared with Andersen:
"The guidance manual demonstrates our commitment to providing clarity to our customers and will help individuals and businesses understand the tax consequences of different types of transactions in cryptoassets. This builds on the previously published policy papers and will provide a more flexible approach to updating customers in this fast-moving sector."
The move by HMRC to create a specific cryptoassets manual is both timely and very welcome and acknowledges the direction of travel in this relatively nascent field. We expect the manual to be built on as both technology and practice develop.
Additions in the manual
The manual does contain new guidance on taxation of staking rewards and derivatives over cryptoassets.
Put very simplistically, participants to a blockchain network have traditionally undertaken to solve complex computation problems in order to prove transactions as authentic and add them to the blockchain (known as the 'proof of work' concept). The reward for those participants is a cryptoasset or token. This is known as 'mining' and the HMRC policy papers established how receipt of these tokens should be taxed. A newer method for validating transactions on the blockchain, known as 'staking', is now deployed whereby the validator stakes their own tokens in confirming the authenticity of a transaction as opposed to solving a complex computational problem (known as the 'proof of stake' concept). The rationale being that a validator wouldn't risk its own tokens simply to cause mischief by stating a transaction as authentic when it is not. The validator then receives additional tokens.
The HMRC policy papers were silent on taxation of staking rewards and we have assumed that they would be taxed in the same way as mining. The new guidance now specifically addresses staking and confirms our earlier assumption to be correct.
Derivatives over cryptoassets
A derivative is a financial instrument where the performance is based on the movement of the price of the underlying asset. Under a derivative the holder does not hold the underlying asset. Some businesses offer the ability for individuals and companies to gain exposure to the movements in the cryptoasset market by using a derivative.
The nature of a derivative is typically very different to directly holding a cryptoasset. In particular, a derivative will give rise to contractual rights and obligations between the two parties. As a result, the manual provides that where a cryptoasset derivative has been entered into the cryptoasset guidance will not generally apply.
Our blockchain and crypto specialist
Zoe Wyatt advises blockchain businesses on the relocation of critical technology and crypto activity to support with regulatory compliance and creation of decentralised autonomous organisations.
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