Gravita's tax offering to the Crypto sector

As the crypto asset landscape continues to evolve, so too will the approaches to its taxation. It’s crucial to stay informed about these changes and understand how they may impact you. Based on the latest guidance from HMRC, we have outlined the key rules you should be aware of.

Private client: Tax on crypto gains

When you sell or exchange crypto assets or tokens you may have a tax liability. This is because crypto and tokens are treated the same way as any other asset, like shares for example.  So, if you buy a token for £100 and sell it for the equivalent of £300, you will make a gain of £200. This gain of £200 is usually chargeable to capital gains tax.

Many crypto investors use platforms to routinely exchange one crypto asset for another. Unfortunately, such exchanges can crystallize a capital gain (or loss, which we will discuss later). Therefore, even if you haven’t converted the crypto asset into FIAT, you may still be liable for tax. For example, if instead of selling a crypto asset for £300, you exchanged it for £300 worth of a different token, you would still trigger a capital gain of £200, which is subject to capital gains tax.

Of course, not all investments work out and sometimes you will make a loss. When this happens, you can offset that loss against any gains made during the same tax year to reduce the amount subject to capital gains tax. While losses cannot be carried backwards, they can be offset against other gains made during the year, such as from the sale of a rental property. Any remaining loss can be carried forward indefinitely to offset against future capital gains.

Of course this is fairly simple scenario. Many crypto investors will often have 1000s of transactions and will need to track taxable gains and losses. The task of calculating the right amount of tax can sometimes be somewhat daunting.

How Gravita can help:  To help our crypto clients overcome this problem, we work with software providers to extract the relevant data and calculate the gains and losses. Our clients that invest in crypto find the software is much more cost effective, quicker, and critically, more accurate as opposed to a painful and expensive manual process.

Income Tax

In the same way that the trading of stocks and shares can be subject to income tax, it is possible that the trading of crypto assets can also be seen in the same way. Whilst it is quite rare, we would urge any crypto investor that carry out a significant number of transactions to speak to their advisor as the tax rates could climb to as much as 47%.

Many investors engage in more than just trading crypto; they also perform other transactions with it. For instance, they might stake their crypto to support a specific operation. When they do this and receive crypto or tokens in return, the value of the received crypto or tokens is subject to income tax. Essentially, it is treated similarly to interest.

IHT on crypto

Generally, it is relatively simple to establish where an Inheritance tax (IHT) liability is due:

1. If somebody is domiciled in the UK; and / or
2. If they have an asset in the UK

When someone is domiciled in the UK, it does not matter where the asset they own is located.  It will always be in the scope of UK inheritance tax. 

However, where that person is not domiciled in the UK and the asset in question is crypto currency or a token, the situs of the asset becomes very important indeed. 

By their very nature, crypto and tokens are not in one place; they are everywhere. So, HMRC (along with other tax authorities around the world) have had to come up with some rules to tackle this issue. 

In simple terms, HMRC state that the situs of the crypto assets or token is the same as the tax residency status of the person holding it (unless it can be linked to an underlying asset in which case it may be situs where that asset is). So, if you are tax resident, the crypto asset is deemed to be in the UK.  If you are not, then it is not either. This creates challenges for non-domiciled individuals who hold these assets personally when they are tax resident in the UK. For those, it may be possible to separate themselves from the asset and keep it outside of the UK inheritance tax net. 

Crypto and corporate tax

HMRC does not operate a specific tax regime for crypto assets, instead HMRC approach is to use existing legislation. Essentially, HMRC categorises crypto asset transactions to fit within the current rules. As you might expect, these rules can become complex, especially if a company’s crypto assets fall under the intangible asset regime. Therefore, it is always advisable to seek professional advice. However, there are a few basic transactions which are treated as follows:

• Receipt of crypto assets in exchange for providing goods or service – the sale is taxable in the usual way
• Sale or exchange of crypto assets – chargeable to corporation tax under the capital gains tax rules like any other asset

Crypto and compliance

HMRC has sent numerous letters to taxpayers they believe hold crypto assets and have not properly declared them on their tax returns. As HMRC continues to enhance transparency for all businesses and individuals, it is crucial for those with crypto assets to ensure compliance to avoid penalties, especially when trading with overseas entities.

Gravita & Appold

We are delighted to be in partnership with Appold, together we offer an unmatched fusion of blockchain specialisation within the industry.

For more information click here.

What next?

For more information on Gravita’s tax offering to the Crypto sector, please contact Thomas Adcock.