Bristol Business Blog: Matt Bracher, managing director, Haines Watts Bristol. The tax implications of investing in crypto

April 12, 2022

The conversation around investing in what is known as a ‘cryptoasset’ is becoming more popular and high profile.

In the UK alone estimates suggest that more than 2m people currently have an investment in cryptocurrencies, such as Bitcoin and Ethereum. 

This is certainly a different market in which to invest – a volatile one, meaning that there are significant gains and losses to be made.

Whilst you may not understand the theory behind the investment (blockchains – please explain!), what was once niche is now becoming a mainstream trend made popular by the likes of Elon Musk who has, in his unique way, demonstrated how to play in the market.

There can be little doubt that cryptoassets will become more popular among regular investors as a way of diversifying. But what are the tax consequences of owning such an asset?

HMRC’s default position is to deem any cryptoassets as a personal investment, meaning that they will be subject to normal Capital Gains Tax (CGT) rules when they are disposed of.

Under the tax rules, cryptocurrency is not considered to be real currency or money. Nor, unless there is a specific spread betting transaction based on the movement of the price of the cryptocurrency, will it be considered a gambling transaction (and therefore exempt from tax).

However, this default position will change if HMRC considers that the cryptoasset has been used to settle employment costs, in which case the value of the settlement will be subject to Income Tax and National Insurance.

Furthermore, if the cryptocurrency is being ‘mined’ then this will be considered a trade and will be also subject to Income Tax.

One of the trickier aspects in relation to the taxation of cryptoassets is trying to determine their location, particularly in terms of whether or not there is an underlying asset.

Normally, digital representations of assets are treated as being located where the underlying asset really is (such as in the case of NFTs – non-fungible tokens). However, where there is no such underlying asset, HMRC consider none of the statutory rules apply and the location of the cryptoasset is where the residency of the beneficial owner is.

Therefore, a UK tax resident will be liable to UK tax even if taxed on the remittance basis.

As a result, unexpected charges can arise if the amount of gain exceeds the annual CGT allowance.

We are commonly asked what the tax treatment is if a debt is settled in cryptocurrency, or what the Inheritance Tax implications will be if cryptocoin is left within an estate.

If you are considering investing in or trading in cryptoassets, or have already done so in the expectation that it will be a non-taxable asset akin to cash, it is really important that you understand the potential consequences that arise from the transaction.

In some cases it is treated as a cash equivalent, in other cases a capital asset and in other cases the profits of a trade – the circumstances of the transaction need to be understood to determine (if any) the tax exposure.

So if you are going to take a dip in the cryptoocean, please do contact us first so that you are aware of what the consequences may be.

And at the same time you could also explain to me what a blockchain really is!

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