HMRC divide cryptocurrency tokens based on their characteristics as no two tokens are always the same. Some might have utility like Ether used as gas fees on the Ethereum network, exchange tokens like the Uni token which is used for governance on the Uniswap protocol, and security tokens which are in basic terms, an investment contract. Most cryptocurrencies are seen as assets, which means when you eventually sell them you will need to pay capital gains tax on the sale. Additionally, HMRC has recently classed tokens awarded through staking consensus mechanisms to be liable for income tax (miscellaneous income).
Transactions involving cryptoassets will be taxed at the corporate rate, applying ordinary principles as to gains and losses. As a result, taxpayers will usually be taxed on crypto-profits either as chargeable gains or as trading profit. Because cryptoassets are not 'money' in the United Kingdom, the loan relationship rules will not apply to a loan of cryptocurrency from one company to another, unless unregulated tokens are the collateral security for a monetary loan.
HMRC does not think that stamp duty or stamp duty reserve tax applies to the transfer of unregulated tokens because they are not stock, chargeable securities or marketable securities.
HMRC thinks that unregulated tokens are not ordinarily consideration for the purposes of stamp duty, except when they are treated as debt. However, unregulated tokens are treated as consideration for the purposes of stamp duty reserve tax.
Value added tax (VAT) is not generally due on the transfer of unregulated tokens. Of course, VAT is due on the underlying service where goods and services are bought with tokens.
Where cryptoassets are received due to a 'hard fork', when assessing capital gains tax, HMRC treats the value of the new cryptoassets as derived from the originating cryptoassets, and costs will be split between the original and the new cryptoassets to calculate any gain on disposal. So no tax is payable on receipt of the new cryptoassets.
HMRC considers that it will be rare for individuals to buy and sell cryptoassets with such frequency and organisation that the activity amounts to a financial trade giving rise to income tax. Ordinarily, individuals pay capital gains tax when they dispose of cryptoassets.
Cryptoassets are awarded to miners for verifying additions to the blockchain. There are currently no regulations which would apply to those who mine cryptocurrency. Whether miners are engaged in a taxable trade depends on the degree of activity, organisation, risk and commerciality. If mining activity does not amount to trade, the monetary value of the award will be taxable as miscellaneous income. The same considerations apply to fees for transaction confirmations. Accordingly, it is advised that miners should confirm if their activities do qualify as a regulated activity under FSMA.
Where employees receive cryptocurrency as earnings from their employer, the asset's value is subject to income tax and National Insurance contributions. Whether tax charge arises under Pay as You Earn depends on whether the tokens are readily convertible assets in the normal way.
Originally published August 10 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.