Huge swathes of new guidance explaining the British taxman’s stance on cryptocurrency have been redacted.
Table of contents
HM Revenue & Customs has released the long-awaited guidance to explain the tax treatment of Bitcoin and other cryptocurrencies.
HMRC says the aim of the new manual is to help crypto traders and investors understand their tax obligations in the UK.
The key point is HMRC does not treat cryptocurrency as money but more like traditional investments, like stocks and shares.
That means capital gains tax is due on cryptocurrency profits.
The stance has not changed since an earlier cryptoassets report was published in 2018.
The redacted content covers compliance topics like risks, indicators of cryptoasset usage and questions tax investigators should ask crypto investors.
The manual simply says the sections are withheld ‘because of exemptions in the Freedom of Information Act 2000’.
What is a cryptoasset?
Cryptoassets are tokens, coins or cryptocurrencies that are transferred, traded and stored electronically, like Bitcoin, Dogecoin or Ethereum.
All cryptoassets are based on a blockchain, but not all blockchain software applications are cryptoassets, so it’s important for crypto traders to know the difference between the two.
Cryptoassets come in four types:
- Exchange tokens – Cryptocurrencies intended to be used as a digital currency, like Bitcoin
- Utility tokens – These are often goods and services offered as a reward in exchange for some form of investment, like a discounted or free book for staking a certain amount of cash to the author
- Security tokens – These are the digital equivalent of paper stocks and shares that give denote a financial interest
- Stable coins – Cryptocurrencies pegged against non-cryptoassets like gold or the US dollar. An example is Tether, a stable coin that tracks the US dollar
Claiming crypto fees as expenses
HMRC is clear that investors cannot set off crypto exchange trading fees against profits.
Exchange fees are:
- Deposit fees when money is left with an exchange account
- Trading fees These are applied on acquiring and disposing of cryptocurrency
- Withdrawal fees – The cost of exchanging cryptocurrencies to money
The guidance says at best, only a minority of the exchange fees can be set off against tax.
Investing in crypto isn’t gambling
The guidance states that HMRC policy is not to consider cryptocurrency trading or investing as gambling.
The manual points out that gambling is not defined in tax rules that govern income tax, CGT or corporation tax.
“Whether a transaction can be characterised as betting or gambling is a question of fact. It will be down to the caseworker to consider the particular facts of any transaction involving cryptoassets and conclude whether that transaction had the character of betting or gambling,” says the guidance.
Tax and crypto mining
Many cryptoassets, including the most popular and widespread – Bitcoin – are created by mining.
Mining involves solving a randomly generated cryptography puzzle in return for a several cryptoassets. Once these assets are sold, they are likely to generate a profit or gain that is taxable.
Crypto assets include derivatives
Derivatives are complicated financial arrangements with performance based on how the price of the underlying asset moves but does not involve holding the asset.
So, a trader can stake money against how much a Bitcoin will rise or fall in value during a specific period with owning any Bitcoin.
Due to the contractual nature of a derivative, the tax treatment is different from that of a cryptoasset.
HMRC publishes separate guidance for derivatives.
Crypto traders urged to keep records
Crypto exchanges outside the UK tend not to keep good records and dispose of them quicker than they are supposed to under UK tax laws.
As a result, HMRC is urging crypto traders to keep meticulous business records.
Similar warnings to other taxpayers, like buy to let landlords, were followed by compliance action aimed at reducing tax avoidance.
HMRC wants traders to keep a detailed note of each crypto transaction that should include:
- Type of cryptoasset ie Bitcoin, Litecoin or Ethereum
- Date of the transaction
- If the coins or tokens were bought or sold
- Number of units involved
- Value of the transaction in pounds sterling on the transaction date
- Cumulative total of the investment units held
- Bank statements and wallet addresses in case these are needed for an enquiry or review
Documents confirming the details, bank statements or withdrawals from crypto ATM machines should be retained and cross-referenced with the ledger.
The records can be kept in writing or digitally but must be retained for six years after the date of the tax return they were included on.
HMRC stresses that taxpayers are responsible for logging their cryptocurrency transactions, not their exchange or bank.
Declaring crypto profits to HMRC
Profits from trading cryptocurrencies are declared each year on a self-assessment tax return for individuals or a corporation tax return for companies.
Crypto profits are treated as capital gains or losses.
Traders get a personal capital gains tax allowance each year of £12,300 – the allowance is frozen until 2025.
Gains over the annual allowance are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers.
HMRC’s crypto manual isn’t law
It’s important to remember that HMRC manuals are guidance for tax investigators and have no force of law.
The contents are HMRC’s view of how the law should be interpreted and are open to challenge through appeals and the courts.
“The aim of this manual is to help people understand the tax implications that can arise from transactions involving cryptoassets. It is written for HMRC staff but may also assist customers and their professional advisers in understanding HMRC’s interpretation of the law as it relates to cryptoassets,” says HMRC.
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