Introduction to tax on cryptocurrency.
There is currently uncertainty around how profits from cryptocurrencies are taxed in the UK. While crypto is an asset for legal purposes the question of whether it is also a ”currency” remains to be decided. HMRC currently say that crypto is not a ‘currency” which has important consequences for how profits from crypto are taxed. HMRC argue that crypto is not a “currency” because they claim that while it is used as a medium of exchange, it is too volatile to be used as a store of value, not used widely enough and is not used as a unit of account
How is cryptocurrency taxed in the UK?
If cryptocurrencies were treated as a currency by HMRC then in most cases they would have to exempt profits on the disposal of crypto. By not recognising crypto as a currency HMRC can state that “the vast majority” of disposals of crypto are subject to capital gains tax (see more on capital gains cryptocurrency at HMRC cryptocurrency Crypt020050).
Income tax and NIC will apply where crypto is received as a non-cash payment by an employee from their employer or from mining, transaction confirmation or airdrops.
Financial trading in cryptocurrencies will attract income tax although HMRC says that trading for tax purposes in crypto is likely to be “unusual”. Presumably, this is to try to limit HMRC’s exposure to allowable trading losses on crypto.
It is vital to speak with crypto tax advisers and obtain cryptocurrency tax advice if you are in any doubt about HMRC will view your crypto activities.
How are my cryptocurrency gains taxed in the UK?
By not recognising crypto as currency HMRC do not permit the CGT exemptions in sections 252 and 269 Taxation of Chargeable Gains Act 1992 to apply. Hence with capital gains, crypto HMRC say that crypto accounts are chargeable assets for CGT purposes so that withdrawals can create a CGT liability. Also, conversion of crypto for purchases outside the UK cannot benefit from the exemption from CGT for the conversion of currency for purchases abroad.
There is also an issue for taxpayers who pay UK tax on the remittance basis. This is the question of where is cryptocurrency situated for tax purposes? In most cases, HMRC treats the crypto as situated where the beneficial owner is resident: Crypt022600. However, this approach ignores the purpose of cryptocurrencies that do not have a location.
Can HMRC seize Crypto assets?
In HMRC crypto tax investigations HMRC is using their civil proceeds of crime powers under the Proceeds of Crime Act 2002 and the Criminal Finances Act 2017 to seize, freeze or forfeit crypto assets where tax evasion is suspected.
Can I appeal against a tax investigation of crypto assets?
If your cryptocurrency has been frozen or seized by HMRC in a crypto tax investigation it may be possible to get it back through the use of appeals and applications for variation or discharge.
Under the Criminal Finances Act 2017 HMRC can apply to the Magistrates Court to freeze a UK bank account balance of £1000 or more. The procedure is civil and not criminal so the burden of proof is the balance of probabilities rather than higher the criminal standard. This would include money represented by the sale of crypto on which tax had not been paid on any gains arising.
HMRC must have reasonable grounds for suspecting that money held in an account is a) recoverable property (property obtained through unlawful conduct), or b) is intended by any person for use in unlawful conduct.
The freezing order may remain in place for up to two years but the money can be forfeited by HMRC if they make a successful application for a forfeiture order, again to the civil standard. The court has to be satisfied that the money or part of it is recoverable property or is intended by any person for use in unlawful conduct.
How Patrick Cannon can help
Patrick is able to provide you with crypto tax advice, represent you in HMRC investigations involving cryptocurrencies and help you resist, appeal or set aside freezing, seizure, forfeiture and also unexplained wealth orders.
Patrick is a direct access barrister so you can if you wish instruct him directly rather than coming through a solicitor.
Frequently Asked Questions
Crypto assets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically (See HMRC’s Crypt010100 )
Yes, HMRC regards the vast majority of crypto disposals as liable to capital gains tax although income tax and NIC will apply where cryptocurrency is received as a reward by an employee and income tax can apply to mining, staking or financial trading in crypto.
HMRC say that the tax treatment of all types of crypto tokens depends on the nature and use of the token and not the definition of the token. HMRC does not consider crypto assets to be currency or money so that the tax exemptions for currency do not apply to crypto.
It is vital to get specialist crypto tax and investigations advice as soon as possible to minimise the chances of HMRC using their legal powers to freeze or seize your cryptocurrencies and to seek a settlement of the investigation that avoids or minimises civil and criminal penalties. It may be necessary to resist or appeal freezing and confiscation orders or to obtain a variation or discharge of such orders and for this specialist legal representation is highly desirable.
The most important thing is not to ignore or mislead HMRC. Co-operation is advised and through this you maximise your chances of a successful outcome on terms that are the least costly to yourself. Expert legal representation during such an investigation can protect you and ensure that your rights are respected and the best defence put forward effectively.
For example, HMRC may argue that your crypto mining is a taxable trade and by failing to pay income tax on your cryptocurrency mining you have evaded tax. HMRC say that whether such activity amounts to a taxable trade (with the tokens as trade receipts) depends on a range of factors such as:
- degree of activity
Normally stamp duty or stamp duty reserve tax is not chargeable on crypto because exchange tokens will not be treated as stock or marketable securities or chargeable securities.
Yes, you can buy a house with crypto if the seller agrees to accept crypto in exchange. The use of cryptocurrency in this situation may give rise to a heightened concern by the professional advisers concerned and any mortgage lender over anti-money laundering checks so enhanced due diligence as to the origin of the crypto can be expected.