UK cryptocurrency tax is still murky territory — here’s how to navigate it

The only things certain in life are death and taxes — and that applies to cryptocurrency tax in the UK, which is still being defined by the HMRC. Navigating this murky territory can be tough without proper guidance, writes Arun Kakar

There are no taxes that apply specifically to cryptocurrency assets in the UK, such as Bitcoin or Ethereum. Anyone holding them as a personal investment is subject to capital gains tax (CGT) on their profits, which need to be reported by self-assessment.

In some circumstances, cryptocurrency-related activity may constitute ‘trading’ and may be subject to income tax, but this is rare, Charles Russell Speechlys tax partner Dominic Lawrance tells Spear’s. ‘It’s quite unusual for the facts to indicate that an individual who is buying or selling investments is “trading”,’ he says. High-frequency transactions may be considered an exception, but ‘most people who hold crypto as an investment are not “trading”.’

Could the equation change? In March 2021, HMRC published an internal manual on cryptoassets – its first since 2018 – setting out its current thinking and offering a preview of how things may change. The guidance is not yet law, and HMRC suggested that views ‘may evolve further as the sector develops’.

The manual broadened the taxman’s definition of cryptoassets to cover areas such as utility tokens (which provide access to goods and services) and security tokens (access to rights/interests in a business). HMRC does not consider cryptoassets to constitute money or currency, but individuals who have received them as a form of non-cash payment could be subject to income tax and national insurance.

The guidance also stated that cryptoassets should be treated as if they are located where their owner is resident. ‘This will or would – if it’s upheld in the test cases that will inevitably come – have significant tax consequences for non-domiciled individuals or accidental UK residents who hold cryptoassets’, Alex Ruffel, international tax partner at Irwin Mitchell, tells Spear’s. If a client is resident or domiciled in the UK, then under current guidance profits are ‘probably reportable’, Ruffel says. If non-domiciled, investors should ‘certainly look at whether to hold their cryptoassets themselves or place them into a holding vehicle to protect them from taxation, in the same way as such protection is afforded to other assets’.

So, what does it all mean for investors now? It is almost certainly wise to record and document any crypto dealings, even for transactions involving tokens or holdings that that are not covered by existing legislation – such as NFTs – and take advice on how to disclose significant gains. An adviser might even suggest disclosing certain dealings and arguing that they are non-taxable, on the basis that this could guard against possible future penalties that may result from changes that come into force further down the line.

‘Almost every tax authority, including HMRC, is playing catch-up,’ says Ruffel. ‘But catch up they almost certainly will.’