On 19 December 2018 HMRC published a paper on the taxation of cryptoassets for individuals. HMRC defines cryptoassets or cryptocurrencies as cryptographically secured digital representations of value or contractual rights that can be transferred; stored or traded electronically. Cryptoassets all use some form of Distributed Ledger Technology (DLT) but not all applications of DLT involve cryptoassets.

The advice points out that HMRC does not consider cryptoassets to be currency or money. Cryptoassets may be exchange tokens; utility tokens; or security tokens. The tax treatment of all types of tokens depends on the nature and use of the token. The HMRC paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens.

Exchange tokens are intended to be used as a method of payment and the definition of exchange tokens includes cryptocurrencies such as bitcoin. These assets use DLT and are generally not underpinned by any other person, group or asset. The value of the exchange token is based on its use as a means of exchange or investment. Exchange tokens do not provide any rights or access to goods or services, unlike utility or security tokens.

Individuals usually hold cryptoassets as a personal investment, either for capital appreciation or to make particular purchases. If individuals receive cryptoassets from an employer as a non-cash payment or if they gain cryptoassets from mining, transaction confirmation or airdrops they are liable to income tax and national insurance contributions. They may be liable to capital gains tax (CGT) on a subsequent disposal.

Financial trading

In some cases the individual may be considered to be running a business and will therefore be liable to income tax on the trading profits. Whether the activity of buying and selling cryptoassets is considered to be a trade would depend on various factors and circumstances of the individual.

Mining

HMRC notes that cryptoassets may be awarded to ‘miners’ for verifying additions to the blockchain digital ledger. Mining generally involves the use of computers to solve mathematical problems in order to generate new cryptoassets. Whether the receipt of cryptoassets could be considered the taxable receipt from a trade depends on factors such as the degree of activity; the organisation; the risk involved and the commerciality.

If the mining activity is not considered to amount to a trade, the pound sterling value (at the time of receipt) of any cryptoassets awarded for successful mining will be considered taxable as income. CGT may be payable on a later disposal.

Fees from mining

Fees or rewards received in return for mining (for transaction confirmation) are also taxable as trading or miscellaneous income depending on the degree of activity; organisation; risk; and commerciality. Where cryptoassets are received as payment for the services provided any increase in value from the time of acquisition will be taxable either as a capital gain or as trading profits.

Airdrops

HMRC notes that an airdrop occurs where someone receives an allocation of tokens or other cryptoassets, for example as part of a marketing or advertising campaign in which people are selected to receive them.

Income tax may not apply if the cryptoassets are received without doing anything in return for them; and are not part of a trade or business involving cryptoassets or mining. Airdrops that are provided in return for, or in expectation of, a service are subject to Income Tax either as miscellaneous income or receipts of an existing trade. The disposal of a cryptoasset received through an airdrop may be liable to CGT.

Record keeping

Individuals must keep separate records for each cryptoasset transaction, including the type of cryptoasset; the date of the transaction; number of units bought or sold; the value of the transaction; the cumulative total of the investment units held; bank statements and wallet addresses.