What do HMRC’s new cryptocurrency taxation guidelines mean?

On Friday, the UK’s tax authority, Her Majesty’s Revenue and Customs (HMRC), released an updated policy on cryptoasset taxation.

The lengthy paper is a complement to its previous guidelines and explains to businesses and sole traders how it will tax transactions involving cryptoasset ‘exchange tokens’ moving forward.

Of particular note is the fact that “HMRC does not consider exchange tokens to be money”.

HMRC specifies exchange tokens only

This new update contains guidelines pertaining to exchange tokens only, such as Bitcoin or Ether, which are not considered to be money by HMRC. The tax authority also states that exchange tokens are not considered as “stock or marketable securities”, which means that they are largely exempt from stamp taxes.

“HMRC does not consider transfers of exchange tokens to be land transactions. This means that Stamp Duty Land Tax will not be payable on such transfers.”

While the HMRC guidelines apply only to exchange tokens, further guidelines are expected in relation to security tokens and utility tokens in the near future. The UK authority also stated that the “cryptoassets sector is fast-moving and developing all the time”. Therefore, taxation regulation will be continually evolving as well.

How will cryptoassets be taxed in the UK?

In the UK, HMRC treats the holding of cryptoassets by individuals as personal investments. This means that they are liable to pay capital gains tax when they convert their tokens to fiat or other tokens.

Moreover, companies (and sole traders) dealing with exchange tokens are liable to pay various different taxes on them. The paper describes such activities as buying and selling exchange tokens, swapping tokens for other cryptoassets, mining, and providing goods and services for exchange tokens.

These actions are all likely to be subject to one or more of the following:

• Capital gains tax
• Corporation tax
• Income tax
• National Insurance contributions
• Stamp taxes
• VAT

The amount of tax will depend on the number of cryptoassets in question. All transactions must be declared annually either through a self-assessment tax return for sole traders or a company tax return.

If you receive your wages in exchange tokens, you must pay income tax and National Insurance contributions.

Keep your transaction records up to date

If you earn, trade, or hold exchange tokens, you’ll need to get good at keeping your transaction records up to date. Moreover, simply noting the value in its token denomination is not sufficient.

HMRC requires all UK businesses (and sole traders) to keep records of cryptocurrency transactions in pounds sterling. This entails applying a “valuation methodology” for these transactions.

So, even in the case where you exchange your tokens for another asset that is not GBP, you must apply an appropriate exchange rate to convert the transaction to pounds sterling.

The value of all gains or losses must be converted into pounds sterling so that you can file your tax return. The authority clearly states that:

“Reasonable care needs to be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. Individuals and companies must also keep records of the valuation methodology.”

You can find further information on how to carry out an appropriate conversion of profits into pounds sterling here.

With HMRC requesting information from cryptocurrency exchanges to reveal customers’ names and transaction histories this August, one thing is clear: if you haven’t been declaring your cryptoasset earnings or transactions, you’ll need to do so.

You should also seek the advice of a qualified tax accountant to assist you further in this matter.

The takeaway

The key takeaway from the update is that it applies solely to exchange tokens. We can expect further guidance to come soon regarding security tokens. The majority of these transactions will be free from stamp tax as HMRC doesn’t consider exchange tokens to be money.

However, beyond this fact – and the recognition that the space is evolving quickly – not much else has changed. If you are trading or earning in cryptoassets like BTC and ETH, get your record-keeping up to date and avoid your taxation liabilities at your peril.