Taxation of Crypto Assets and Blockchain in the UK

Crypto assets and blockchain technologies have gained significant attention and popularity in recent years. In the United Kingdom, the tax treatment of crypto assets and blockchain transactions is evolving as the technology and its applications continue to develop.

While the UK lacks specific legislation and domestic tax case law regarding crypto assets, the taxation of such assets is guided by general taxing principles and HMRC (Her Majesty’s Revenue and Customs) guidance.

This article will explore the taxation of crypto assets in the UK, focusing on various aspects including the nature of the crypto asset, the substance of the transaction, and how existing tax frameworks apply.

Defining Crypto Assets

Crypto assets in the UK are defined by HMRC as “cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically.”

This definition distinguishes them from traditional money or currency. However, it’s important to note that the UK Jurisdiction Taskforce has a slightly different legal analysis, emphasizing the cancellation of one asset and the creation of another, rather than a transfer.

Classification of Crypto Assets

The classification of a crypto asset is crucial for determining its tax treatment. The primary factors considered are:

  • Legal Nature: The categorization of a crypto asset, such as whether it is deemed a tangible or intangible security or a civil asset, significantly affects how it is taxed.
  • Substance of the Transaction: This considers whether a taxable event occurs in relation to the crypto asset and whether it is treated as income or capital. Taxation on conversion, sale, and handling of value volatility must also be determined.
  • UK’s Existing Tax Framework: The tax treatment is influenced by the legal nature of the entities involved, be it individuals, corporate entities, or others.

Crypto Assets Types

In 2018, the UK Government’s Crypto asset Taskforce recognized three types of crypto assets: Exchange Tokens, Utility Tokens, and Security Tokens.

In the subsequent HMRC guidance, a fourth category, Stablecoins, was added:

  • Exchange Tokens: Used for payments and investments, with their value based on usage for exchange or investment. They typically do not provide rights or access to goods or services.
  • Utility Tokens: Provide access to specific goods or services on a blockchain platform and may be traded. The issuers usually commit to accepting these tokens as payment.
  • Security Tokens: Provide holders with rights or interests in a business, such as debt or profit shares.
  • Stablecoins: Tokens pegged to stable values like fiat currencies to minimize volatility.

Regulation and Blockchain Technology

Regulation and taxation of cryptoassets are still evolving, with a particular focus on exchange tokens by HMRC.

Decentralized finance (DeFi) has become a subject of concern, with ongoing discussions to clarify the tax positions for parties involved in lending and staking on DeFi platforms.

Taxation Guidelines for Individuals

HMRC considers that individuals typically hold cryptoassets for personal investment. Therefore, capital gains tax applies when they sell or dispose of these assets.

Income tax and national insurance contributions may also apply when individuals receive crypto assets from their employers or through mining, transaction confirmation, or airdrops.

Corporation Tax and Capital Gains Tax

For corporations, cryptoassets are treated as chargeable assets for capital gains tax purposes.

The rules for intangible fixed assets take priority for corporation tax. Exchange tokens or other crypto assets held as investments are liable for corporation tax on gains upon disposal.

Transfer Taxes

Stamp duty and stamp duty reserve tax are applied on a case-by-case basis depending on the nature of the crypto asset. HMRC’s latest policy suggests that exchange tokens and utility tokens are unlikely to meet the definitions for these transfer taxes, while security tokens may be subject to them.

VAT

VAT is due on goods and services sold in exchange for crypto assets. HMRC views the value of the supply of goods or services as the pound sterling value of the exchanged tokens at the transaction’s point. Crypto asset exchanges’ financial services are exempt from VAT, following a 2014 HMRC decision and a subsequent ruling from the Court of Justice of the EU.

Conclusion

The taxation of crypto assets and blockchain technology in the UK is a complex and evolving area. While HMRC provides guidance on various aspects of taxation, further developments in regulations and international consensus are needed to create a comprehensive and consistent framework for the taxation of crypto assets. As the technology continues to advance, it is crucial for both individuals and businesses to stay informed and compliant with the evolving tax rules and regulations related to crypto assets in the UK.