The tax implications for businesses of buying, using and selling cryptoassets
Stephen Relf examines the tax implications of buying, using and selling cryptoassets from the point of view of an individual or a company carrying on, or intending to carry on a business.
In simple terms, cryptoassets – and in particular, exchange tokens – are digital representations of value or rights. For a detailed description, see HMRC’s Crypotassets Manual at CRYPTO 10100. As cryptoassets become more popular it is increasingly likely that businesses will require advice on the tax implications. So, how are cryptoassets taxed?
In the absence of tax legislation relating specifically to cryptoassets, we must apply general principles with help from HMRC’s guidance.
One way to approach this is to consider the questions below.
- How was the cryptoasset acquired?
- If it was bought, was it bought to sell at a profit or to use in an existing trade?
- If it was bought to sell at a profit, do the activities amount to a trade?
- If it was earned, was it through activities such as mining, etc. or through other trade activities?
- If it was earned through mining, do the activities amount to a trade?
We’ll look at the tax implications of the different scenarios in the following paragraphs, but before we do please note the following general points:
- HMRC do not regard buying and selling cryptoassets to be gambling (CRYPTO 10450);
- HMRC do not regard cryptoassets as being money or currency; further, HMRC believe that, in most circumstances, cryptoassets do not create a loan relationship (CRYPTO 41100);
- in general, the cryptoasset will be accounted for as stock/inventory (in the case of a person carrying on a trade of dealing in cryptoassets) or as an intangible asset; and
- it is not the case that a cryptoasset that is accounted for as an intangible asset automatically falls within the Intangible Fixed Assets (IFAs) rules; indeed, in the circumstances envisaged in this article, it is unlikely that the cryptoasset will fall within the IFAs rules. For guidance on the IFAs rules, see CRYPTO 41150.
You may also find this quick reference guide useful.
Acquired | Why/how | Trade? | Summary of tax treatment |
Bought | Sell for profit | Yes | Included in trade income (new trade) |
Bought | Sell for profit | No | Chargeable gain/loss on disposal |
Bought | Use in business | N/a | Included in trade income (existing trade) |
Earned | Mining | Yes | Included in trade income (new trade) |
Earned | Mining | No | Miscellaneous income on acquisition |
Earned | Other | n/a | Included in trade income (existing trade) |
Gift | n/a | n/a | None on acquisition; gain/loss on disposal |
Bought to sell at a profit
Where the business acquired the cryptoasset to sell it at a profit, we must apply the normal rules, including the badges of trade, to determine whether the business is carrying on a trade of dealing in cryptoassets.
HMRC’s view (see CRYPTO 40150) is that “only in exceptional circumstances” would activities of this nature amount to a trade. This is because HMRC view a trade in cryptoassets as being akin to a trade in shares and securities. Therefore, HMRC will look to see if the person: has experience of dealing in cryptoassets; has a realistic business plan showing that a profit will be made; carries on the activity in a commercial manner; buys and sells cryptoassets frequently and has sufficient time to devote their activities.
Where a trade of dealing in cryptoassets is being carried on, the charge to tax on trading income will apply in the normal way.
Where the cryptoasset is held for investment purposes, the position is likely to be that the disposal of the cryptoasset will give rise to a chargeable gain or loss.
Bought to use in the business
The person may have bought the cryptoasset to use it in an existing trade; for example, to pay for goods or services. In this case, the cryptoasset is taken into account in calculating the person’s trade income in the normal way. See CRYPTO 40350.
Earned through mining, etc.
The person may have been allocated cryptoassets having solved a cryptographic puzzle using a computer or computers (‘mining’) or by contributing to the proof of stake work that validates a block on the blockchain (‘staking’).
Whether or not these activities amount to a trade depends on general principles, including the badges of trade. For example, where a person, who has a realistic intention of making a profit, goes about the activities in a commercial and organised way, it is likely that they are carrying on a trade. HMRC’s guidance (at CRYPTO 40200) includes the following example.
“…using a home computer while it has spare capacity to mine tokens would not normally amount to a trade. However, purchasing a bank of dedicated computers to mine tokens for an expected net profit (taking into account the cost of equipment and electricity) would probably constitute trading activity.” |
Where a trade is being carried on, the value of the cryptoasset will be brought into account as trading income.
In any other case, the value of the cryptoasset (net of allowable expenses) is chargeable to tax as miscellaneous income. The person may have a capital gain or allowable loss when they come to sell the asset.
Earned through other activities
A person carrying on a trade may receive payment for goods or services in cryptoassets. In this case, the value of the cryptoassets are taken into account in calculating the person’s trade income (see CRYPTO 40350).
Other tax issues may arise depending on how the crytoassets are then used; for example, a chargeable gain or allowable loss may arise on the sale of the cryptoasset.
Received as a gift
An airdrop - being where a person receives a cryptoasset, perhaps as part of a marketing campaign - may fall within this category if the person has not earned the cryptoasset and is not engaged in a trade of dealing in cryptoassets or carrying-on mining, etc. activities.
In this case, there may not be a charge to tax on receipt; however, the person may have a chargeable gain should they sell the cryptoasset.
In this article we’ve looked at the tax implications for businesses but individuals may also buy, earn and sell cryptoassets. For HMRC’s guidance, see CRYPTO 20000.
Stephen is a Tax Writer at Croner-i. Prior to joining Croner-i, Stephen was head of the technical team at the CIOT.
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