HMRC has issued letters to owners of cryptoassets asking them to consider their capital gains tax position when dealing with cryptocurrencies online. The nudge letters remind UK taxpayers that the disposal of cryptoassets may lead to a capital gains tax charge, and identifies a “disposal” as:
- The sale of cryptoassets for fiat currency (e.g. GBP, USD).
- The exchange of one cryptoasset for another.
- The use of cryptoassets to buy goods or services.
If any of the above transactions result in a capital gain in excess of the taxpayers’ annual allowance (currently £12,300), the gain will be required to be reported to HMRC, usually via a Self-Assessment Tax Return.
What are cryptoassets?
Also known as cryptocurrency, cryptoassets are a form of electronic cash. They exist in digital format only and can be used to make online payments between users of the assets. There are thousands of different cryptocurrencies in existence, with Bitcoin, Ripple and Ethereum having made recent news headlines. Unlike recognised currency such as sterling, cryptoassets are not managed by a central government bank and carry significant risks. The value of cryptoassets can fluctuate dramatically, and past trends have seen a 65% increase in value in one day and 25% decrease in value in another.
Non-UK domiciled individuals
HMRC have not issued letters to non-UK domiciled owners of cryptoassets, potentially leading to confusion surrounding the physical location of cryptoassets. In the HMRC manual CRYPTO22600 HMRC considers the situs of a cryptoasset for capital gains tax and inheritance tax purposes and states that “where the cryptoasset is simply a digital representation of an underlying asset then the location of the underlying asset will determine the location of the cryptoasset”.
In the case of cryptoassets, there is typically no underlying asset, and in this case none of the statutory rules in TCGA 1992 apply. Alternatively, HMRC take the view that:
- exchange tokens have an economic value as they can be ‘turned to account’ – for example, exchanging them for goods, services, fiat currency or other tokens;
- exchange tokens are a new type of intangible asset (different to other types of intangible assets, such as shares or debentures); and
- the only identifiable party to consider is the beneficial owner of the exchange token
“such that the location of the cryptoasset will be determined by the residency of the beneficial owner”
In conclusion, a UK resident individual will always be liable to capital gains tax on the sale of cryptoassets if they are the beneficial owner, regardless of their place of domicile.