HMRC’s cryptocurrency tax treatment introduced without law

The latest HMRC guidance on the tax treatment of cryptocurrency comes without any legislation underpinning it, warns tax and advisory firm Blick Rothenberg

The release of the latest cryptocurrency guidance on taxation issues for businesses saw HMRC updating the cryptocurrency manual on gov.uk.

Nimesh Shah, CEO at Blick Rothenberg said: ‘It’s disappointing that the government have not produced legislation for this complex area and have left it to HMRC to decide how cryptocurrency transactions should be treated.’

He added: ‘Cryptocurrency is not a new area and the government have to act to produce clear and defined law so that there is no ambiguity for taxpayers on how profits and losses should be assessed.

As cryptocurrency usage and investment levels grow, global regulators have not established a coherent approach to taxation and investor liability with disparate rules across all jurisdictions.

HMRC has brought together a number of different guidance notes on the taxation of cryptocurrency.

The manual stresses that the question of whether a trade is being carried on is a key factor in determining the correct tax treatment. Whether the buying and selling of exchange tokens amounts to a trade depends on a range of factors including frequency, level of organisation and intention.

If a person’s activities do amount to a trade, the receipts and expenses will form part of the calculation of the individual or company’s trading profit.

If activities are considered to be trading then:

  • for individuals, income tax will take priority over capital gains tax and will apply to profits (or losses);
  • for companies, profits (or losses) will form part of the trading profits instead of being a chargeable gain.

It is important to note that crypto assets are not treated as currency or money. ‘A trade in crypto asset exchange tokens would be similar in nature to a trade in shares, securities and other financial products,’ HMRC stated, pointing to case law on share trading as a benchmark for its treatment of crypto.

Companies that account for exchange tokens as ‘intangible assets’ may be taxed under corporation tax rules for intangible fixed assets if the token is an ‘intangible asset’ for accounting purposes and an ‘intangible fixed asset’ (this means it has been created or acquired by a company for use on a continuing basis. Exchange tokens which are simply held by the company, even when held in the course of its activities, will not meet this definition).

When a person calculates their gains/losses from the disposal of tokens, not all costs are allowable as a deduction.

Section 38 of the Taxation of Chargeable Gains Act (TCGA) 1992 provides for the types of costs which can be deducted. HMRC’s view is that these include:

  • the consideration (in pound sterling) originally paid for the asset;
  • transaction fees paid for having the transaction included on the distributed ledger;
  • advertising for a purchaser or a vendor;
  • professional costs to draw up a contract for the acquisition or disposal of the tokens; and
  • costs of making a valuation or apportionment to be able to calculate gains or losses.

Any costs deducted against profits for income tax, see CG10260, are not allowable as a deduction for capital gains tax.

VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.

The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.

The new HMRC guidance brings together the tax authority’s interpretation of relevant tax liability, referencing existing tax laws which relate to the tax treatment of crypto assets, rather than updating current legislation.

Shah said: ‘Last week’s ‘Tax Day’ was a missed opportunity for the government to publish a consultation on the taxation of cryptocurrency. After all, the message of Tax Day was to start a journey on modernising the tax system, yet we do not have legislation on the growing cryptocurrency market.’

He added: ‘The guidance published today in HMRC’s manuals follows several piecemeal releases in 2018 and 2019. It is extensive and detailed and is a significant step forward to previous versions.’

‘Whilst HMRC’s guidance is an improvement to provide further clarity in this area, which is becoming a more common investment and activity, it’s important to remember that this merely represents HMRC’s interpretation and is not law.’

HMRC crypto assets manual

 

Sara White |Editor, Accountancy Daily, published by Croner-i

Sara White is editor of Accountancy Daily, published by Croner-i, and in...

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