Cryptocurrencies are a new asset class that has been developed over the last decade. They have changed dramatically throughout this time, and so has the government regulation surrounding them. Recap, alongside UK tax accountants, have produced this comprehensive Cryptocurrency Tax Guide to collect all of the relevant information regarding cryptocurrency taxation for UK individuals in one place.
Recap is the UK focused cryptocurrency tax calculation software with end-to-end encryption. We make calculating capital gains tax positions relating to cryptocurrencies simple, as will be demonstrated throughout this informative guide. Recap’s founders Ben and Dan helped to define the UK’s regulatory position on Bitcoin and cryptocurrencies in 2013 and have been involved in the industry since then.
Throughout this guide, we will use HMRC’s terminology, e.g. cryptoassets instead of cryptocurrencies. All of the sources used in this guide are either articles published by chartered accountants or from HMRC themselves.
Disclaimer: This guide is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this guide.
HMRC defines cryptoassets as “cryptographically secured digital representations of value or contractual rights” that have the potential to be transferred, stored and traded electronically .
They do not consider cryptoassets such as Bitcoin and Ethereum to be currency or money. The government’s Cryptoasset Taskforce (CATF) identifies three types of cryptoassets: exchange tokens, utility tokens and security tokens .
Exchange tokens – these are intended to be used as a method of payment and include cryptocurrencies like Bitcoin and Litecoin. They do not provide any rights or access to goods or services.
Utility tokens - these provide the holder with access to particular goods or services on a platform usually using Distributed Ledger Technology (DLT).
Security tokens - these may provide the holder with particular interests in a business, including debt due by the business or a share of profits in the business.
We will not go into more detail about the different types of cryptoassets, as their treatment for taxation purposes is based on the “nature and use of the token and not the definition of the token” .
This summary only considers the taxation of exchange tokens (like Bitcoin) and does not specifically consider utility or security tokens. HMRC indicate a different tax treatment may need to be adopted for utility and security tokens, but they have not provided any guidance in this regard to date.
In 2014, HMRC stated in their tax guidance for cryptoassets that “a transaction may be so highly speculative that it is not taxable or any losses relievable”. This was interpreted as comparing cryptoasset trading to gambling for tax purposes (meaning gains are not taxable). HMRC reversed their position in their December 2018 guidance, as cryptoassets became more widely used and accepted throughout the UK. They have now clearly stated that they do not consider the buying and selling of cryptoassets to be the same as gambling. This means that unless the individuals are treated as engaging in financial trading in cryptoassets, cryptoassets are now treated as capital assets, and investors who dispose of them must consider their capital gains tax liability .
Anyone who holds cryptoassets needs to consider if they are engaged in financial trading in cryptoassets, rather than simply assuming they are taxed under the capital gains tax regime (as an investor). Individuals who are classified as financial trading in cryptoassets are required to pay income tax and national insurance on their profits, rather than capital gains tax on their gains. Therefore, being classified as a trader rather than investor usually results in a higher tax bill. Fortunately, HMRC has stated that the classification of cryptoasset users as traders is “likely be unusual”. Consideration of whether or not an individual is engaged in financial trading is a very complex area. It is not as simple as working through the ‘Badges of Trade’  as these have been demonstrated to have limitations in the field of financial trading. The relevant considerations have been detailed in the Appendix to this report, which explores the approach HMRC would take to gather the facts of the case and summarises relevant case law on the topic.
The tax position regarding individuals trading and investing in CFD’s (Contract for Difference), Futures and margin trading is very unclear as there is no HMRC guidance specific to cryptoassets. Assuming the individual is not treated as a financial trader, it is not clear if the gains or losses are to be taxed under the capital gains regime or be treated as miscellaneous income.
Cryptoassets are treated as property for Inheritance Tax (IHT) purposes. This means that they will form part of an individual’s Estate on death and IHT may be payable, depending on the overall size of the Estate. Gifts during an individual’s lifetime to another individual are Potentially Exempt Transfers (PETs). IHT may be payable if the donor dies within 7 years of making the PET. Gifts into a Trust are Chargeable Lifetime Transfers which may be subject to IHT at the date of transfer. If you are contemplating gifts or transfers at an undervalue of cryptoassets, it is recommended you seek bespoke advice from a qualified tax professional.
Most transactions involving cryptoassets are subject to Capital Gains Tax (CGT). Individuals must calculate the gain or loss they have made whenever they “dispose” of cryptoassets. HMRC guidance confirms that disposals (taxable events) include:
Moving tokens between wallets owned by the same person does not result in a disposal.
The allowable costs are deducted from the disposal proceeds, to calculate the gain or loss on each and every disposal made in the tax year. An order to sell 10 Bitcoin could be fulfilled with 200 disposals (for example). The capital gain or loss needs to be calculated for each disposal, although disposals on the same day of the same type of cryptoasset can be aggregated.
Assuming there are no disposals to connected parties, any losses in the tax year are deducted from the gains in the tax year. If the net gain (after the offset of losses in the year) is more than the annual CGT exemption (currently £12,000 in 2019/20), the excess is subject to capital gains tax for a UK individual taxpayer; unless it can be reduced by capital losses brought forwards from a prior tax year. Brought forward losses can only be used if they have been declared to HMRC previously on a Tax Return or by letter.
If the net gain is less than the annual CGT exemption, no CGT is payable.
Please see the section on Reporting Income and Gains to HMRC and Paying the Tax for further details on when and how to report gains and losses to HMRC, when to register with HMRC and when to pay the tax.
The Recap tax report provides a summary of all the relevant information to be included on your annual Tax Return. The intention is that you pass our report to your accountant and they will be able to complete the Tax Return and advise on your tax position, based on your specific circumstances. A gain or loss is calculated for every disposal as detailed calculations are also included in the detailed tax report. You will have a full audit trail in case HMRC decide to investigate the capital gains entries on your Tax Return. Recap can also provide a record of the allowable costs of the cryptoassets still held.
The rate of CGT for disposals of cryptoassets depends on your other income in the tax year. In the current tax year 2019/20, the basic rate band for income tax in the UK (excluding Scottish Tax Residents) is £37,500 and the personal tax free allowance is £12,500. This means that higher rate tax is only payable when the income and gains together exceed £50,000. For example, if an individual has income of £30,000 in 2019/20 and £25,000 capital gains above the annual exemption; £20,000 of the capital gains will be taxed at the basic rate of 10% and £5,000 of the capital gains will be taxed at the higher rate of 20% .
It is vital to identify the correct disposal proceeds in sterling for each disposal made and it is not always as straightforward as you might think.
Disposals made to a connected party (other than a spouse/civil partner) are deemed to be made at market value. Any actual consideration (e.g. payment) given by the connected party for the cryptoasset is ignored. Instead the disposal proceeds used in the capital gains calculation is the market value of the cryptoasset disposed of, at the date of disposal. Losses can only be used against gains to the same connected person. For more information on disposals to connected parties and who is connected see the Appendix.
Even where two parties in a transaction are not ‘connected’, the deemed proceeds will be market value where there has been a gift or where the recipient has paid less than market value. The market value of the cryptoasset at the date of disposal needs to replace the actual proceeds received by the seller in the capital gains calculation. The exception is where the gift is to a spouse or civil partner, for which there are special inter-spouse transfer rules instead.
Disposals to a spouse or civil partners are usually treated as made with no gain and no loss, but often still need to be reported on the Tax Return. The disposal proceeds are deemed to equal the allowable costs. There are however certain restrictions, including when a couple has separated and the detailed guidance regarding inter-spouse transfers in the Appendix should be considered.
Relief from capital gains tax is given in respect of disposals of cryptoassets to a charity, a community amateur sports club (CASC), or to a body for a National Purpose (e.g. The British Museum). When the recipient pays no more than the CGT allowable costs for the cryptoasset and it is not a tainted donation, the disposal is treated as being made for no gain and no loss. Therefore the disposal proceeds are deemed to equal the allowable costs. See the Appendix for more information on relief from gifts to charity and what is a tainted donation.
Below is a summary of the disposal proceeds for each type of taxable disposal:
If selling for full market value, the disposal proceeds are the sterling equivalent of the fiat money received by the seller.
If selling for less than market value, the disposal proceeds are the sterling market value of the cryptoasset sold, regardless of the fiat money paid to the seller. This is the position whether or not the buyer and seller are connected parties.
If the parties are connected (other than spouse or civil partner), the disposal proceeds are the sterling market value of the cryptoasset sold, regardless of the fiat money paid to the seller.
If the sale is to a spouse or civil partner, any actual consideration (e.g. payment) received by the seller is ignored. There is no gain and no loss, provided the detailed rules are met (see the Inter-Spouse transfers guidance in the Appendix for more info). Therefore the disposal proceeds are equal to the sterling allowable costs of the seller.
If the sale is to a charity, community amateur sports club (CASC) or body for a National Purpose and the payment by the recipient is more than the allowable costs, there is a capital gain and the disposal proceeds are the actual payment received by the seller. Where the payment is no more than the CGT allowable costs and it is not a tainted donation it is treated as a disposal at no gain and no loss. Therefore the disposal proceeds are deemed to equal the allowable costs.
The disposal proceeds are the sterling market value of the cryptoasset disposed of.
This is a barter transaction and is treated as though you had sold the cryptoassets to the person providing the goods or services and then used the fiat money they gave you to purchase their goods or services.
If the cryptoasset is worth the same as the items paid for (so you are effectively paid full market value for selling the cryptoasset), the disposal proceeds are the sterling market value of the cryptoasset disposed of (or more simply valued as the cost of the goods or services purchased).
If the cryptoasset is worth less than the items paid for (so you are effectively paid less than market value for the cryptoassets sold), the disposal proceeds are the sterling market value of the cryptoasset disposed of, rather than the cost of the goods or services purchased.
If the parties are connected (other than spouse or civil partner), the disposal proceeds are the sterling market value of the cryptoasset sold, rather than the cost of the goods or services purchased.
If the sale is to a spouse or civil partner, any actual consideration (e.g. payment) received by the seller and the market value is ignored. There is no gain and no loss, provided the detailed rules are met (see the Inter-Spouse transfers guidance in the Appendix for more info). Therefore the disposal proceeds are equal to the sterling allowable costs of the seller.
If the transfer is to a charity, community amateur sports club (CASC) or body for a National Purpose and the worth of the goods or services provided by the recipient is more than the allowable costs, there is a capital gain and the disposal proceeds are the sterling equivalent of the actual goods and services received by the seller.
If gifting or selling cryptoassets for less than market value, the disposal proceeds are the sterling market value of the cryptoasset sold, regardless of the fiat money paid to the seller. This is the position whether or not the buyer and seller are connected parties. The position for spouses and civil partners is different and set out below.
If the gift or sale at less than market value is to a spouse or civil partner, any actual consideration (e.g. payment) received by the seller is ignored. There is no gain and no loss, provided the detailed rules are met (see the Inter-Spouse transfers in the Appendix for more info). Therefore the disposal proceeds are equal to the sterling allowable costs of the seller.
For disposals of cryptoassets to a charity or community amateur sports club (CASC); where the payment is no more than the CGT allowable costs and it is not a tainted donation; it is treated as a disposal for no gain and no loss. Therefore the disposal proceeds are deemed to equal the allowable costs. If the payment by the recipient is more than the allowable costs, there is a capital gain and the disposal proceeds are the actual payment received by the seller.
When calculating the cost of acquisition for CGT on cryptoassets, individuals must follow HMRC’s guidance regarding “Pooling”. These rules are the same as those used to calculate the CGT on the disposal of shares. HMRC describes the concept of pooling as “Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a ‘pool’. The consideration (in pounds sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’” .
To find the allowable cost (also known as the base cost) for the CGT computation, the first step is to identify which cryptoassets which have been sold.
The ‘matching rules’ as set out below determine the order in which cryptoassets are deemed to have been sold. On the disposal of cryptoassets, they are first matched with acquisitions:
made on the same day (same day rule), then
made in the next 30 days on a first-in first-out basis (bed and breakfasting rule), not including cryptoassets acquired when the taxpayer is non-resident or treaty non-resident in the UK, then
made on or after 31 March 1982 – the rest of the acquisitions aggregated in the S104 pool (pooling rule).
Once the deadlines for same day and next 30 days acquisitions have passed, these cryptoassets are also added to the S104 pool.
There is a S104 pool for each type of cryptoasset held. The pool is an aggregate of all the acquisitions which are not sold within the subsequent 30 days. Therefore an average cost for the cryptoassets in the pool is maintained and a pro-rata cost is deducted from disposals using the matching rules.
Below is HMRC’s example, which helps to explain pooling and bed and breakfasting when dealing with cryptoassets:
Melanie holds 14,000 token B in a pool. She spent a total of £200,000 acquiring them, which is her pooled allowable cost.
On 30 August 2018 Melanie sells 4,000 token B for £160,000. Then on 11 September 2018 Melanie buys 500 token B for £17,500.
The 500 new tokens were bought within 30 days of the disposal, so they do not go into the pool. Instead, Melanie is treated as having sold:
the 500 tokens she has just bought
3,500 of the tokens already in the pool
Melanie will need to work out her gain on the 500 token B as follows:
|Consideration||£160,000 x (500 / 4,000)||£20,000|
|Less allowable costs||£17,500|
Melanie will also need to work out her gain on the 3,500 token B sold from the pool as follows:
|Consideration||£160,000 x (3,500 / 4,000)||£140,000|
|Less allowable costs||£200,000 x (3,500 / 14,000)||£50,000|
Melanie still holds a pool of 10,500 token B. The pool has allowable costs of £150,000 remaining.
As you can see from the above calculation, for one disposal of one cryptoasset in simplified terms, calculating an accurate capital gains tax position for cryptoasset users who have more than even a few trades is extremely inefficient to do manually. The above example doesn’t take into account the difficulties locating accurate fiat sterling pricing data for cryptoassets; in addition to compiling and matching transaction data from across multiple exchanges and wallets.
Luckily, Recap co-founder Dan Howitt went through this process in 2017 and decided things needed to change. It took 38 hours of Dan’s own time and 5 hours of his accountant’s time attempting to gain an accurate capital gains tax position for his cryptoasset investments. Now, through using Recap, Dan’s tax return for his cryptoasset transactions takes minutes rather than hours.
Recap’s desktop application with end-to-end encryption allows users to link with their exchange accounts and wallets via read-only API connections which extract the data to the desktop application. Users can also upload CSV files of their transaction history. Once all the user’s data has been collected in the app, they can generate a tax report for the desired tax year. The platform has been designed around HMRC’s tax rules for cryptoassets, including bed and breakfasting and same day rules. It also allows users to account for forks, airdrops, gifts, purchases in cryptoasssets and many other nuances of cryptoasset taxation.
The best part about Recap is the financial privacy it gives you. Unlike every other cryptocurrency tax product on the market, Recap can never see your financial data because we use end-to-end encryption. If you’d like to give Recap a try, click the button below!
In addition to the acquisition cost of the cryptoasset being an allowable cost to deduct in the capital gains calculation, there are also incidental costs of purchase and disposal that can be deducted.
HMRC states  that incidental allowable costs include:
transaction fees paid before the transaction is added to a blockchain
advertising for a purchaser or a vendor
professional costs to draw up a contract for the acquisition or disposal of the cryptoassets
costs of making a valuation or apportionment to be able to calculate gains or losses
There remains a great deal of uncertainty regarding which fees can be deducted. The fees set out below are all incurred before the transaction is added to the blockchain, but it is not clear if they would be considered by HMRC to be transaction fees in connection with the acquisition and disposal of cryptoassets; and therefore allowable incidental costs of acquisition or disposal. We have sought written guidance from HMRC regarding the allowability of these costs and are awaiting a reply.
Below is an example to highlight the different fees that could be paid. As it is not clear if these costs can be deducted, it will be up to the individual to decide whether or not to deduct them in their capital gains computation. If HMRC challenge the Tax Return and successfully argue that these costs are not deductible, additional tax, interest and penalties will be payable to HMRC.
Example – buy 10 REP with GBP on a European exchange, convert to BTC then sell:
Convert Sterling to Euros – FX fee and/or FX exchange rate commission paid.
Transfer Euros to the Exchange - deposit fee incurred from the Exchange Wallet.
Place order to buy 10 REP with Euros – fee charged by Exchange for every fill of the order (e.g. may be fulfilled with 200 purchases).
Place order to sell 10 REP for BTC (let’s say they got nervous about holding REP) – fee charged by Exchange for every fill of the order (e.g. may be fulfilled with 200 purchases).
Transfer BTC from Exchange to Wallet to hold as investment – blockchain fee charged and the Exchange charges a withdrawal fee.
Transfer BTC from Wallet to Exchange (decided to sell for fiat) – blockchain withdrawal fee incurred from Wallet.
BTC added to Exchange – deposit fee charged by Exchange.
Place an order to sell 10 BTC – fee charged by Exchange for every fill of the order (e.g. may be fulfilled with 200 disposals).
Transfer the Euros received for the Bitcoin from the Exchange into the taxpayer’s UK bank account.
– withdrawal fee charged by the Exchange and a commission fee charged by the UK bank for receiving Euros into a Sterling account, by using a less favourable exchange rate with an effective fee built in.
As a result of the nature of cryptoassets and their distribution, there are several events which affect the tax treatment and the calculation of the capital gains. These include Forks and Airdrops.
Some cryptoassets operate by consensus amongst that cryptoasset’s community. When a significant part of the community want to do something different they may create a ‘fork’ in the blockchain. There are two types of forks, a soft fork and a hard fork. A soft fork updates the protocol and is intended to be adopted by all. No new tokens, or blockchain, are expected to be created and there is no impact on the tax position.
A hard fork is different and can result in new tokens coming into existence. Before the fork occurs there is a single blockchain. Usually, at the point of the hard fork, a second branch (and therefore a new cryptoasset) is created. The blockchain for the original and the new cryptoassets have a shared history up to the fork. If an individual held tokens of the cryptoasset on the original blockchain they will, usually, hold an equal number of tokens on both blockchains after the fork.
The value of the new cryptoassets is derived from the original cryptoassets already held by the individual. After the fork, the new cryptoassets need to go into their own pool. Any allowable costs for pooling of the original cryptoassets are split between the two pools for the:
original cryptoassets; and
Costs must be split on a just and reasonable basis. HMRC does not prescribe any particular apportionment method. It is standard practice (based on the treatment of shares, because cryptoassets use the same rules) that the cost of the original cryptoasset is apportioned between the old and new cryptoasset, pro-rata in line with the respective market values of each cryptoasset the day after the hard fork.
HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable. Therefore whichever method an individual chooses to use, they should keep a record of this and be consistent throughout their tax returns .
An airdrop is when an individual receives an allocation of tokens or other cryptoassets, for example tokens given as part of a marketing or advertising campaign. Other examples of airdrops may involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop. The airdropped cryptoasset typically has its own infrastructure (which may include a smart contract, blockchain or other form of Distributed Ledger Technology) that operates independently of the infrastructure for an existing cryptoasset.
The receipt of an Airdrop is not a taxable event for capital gains tax purposes (however, it could be for income tax purposes - see the 'When are Airdrops taxable income?' section below). The tokens of the airdropped cryptoasset will need to go into their own pool unless the recipient already holds tokens of that cryptoasset, in which case the airdropped tokens will go into the existing pool. The value of the airdropped cryptoasset does not derive from an existing cryptoasset held by the individual, so no apportionment of an existing cost is required. The acquisition cost of the cryptoassets received via the airdrops is the market value at the date of receipt.
If the disposal of a cryptoasset received via an airdrop is for more than the acquisition cost, it will result in a chargeable gain for capital gains tax, regardless of whether it is treated as income or not upon its receipt.
HMRC has released guidance confirming that if an asset now has little or no value, an individual can submit a negligible value claim to HMRC to crystallise (‘bank’) a capital loss for cryptoassets they still own. You have to demonstrate that the asset had value and has later become of negligible value while you own it. This claim and the loss resulting from the claim is to be reported in a Tax Return. You are deemed to dispose of the cryptoasset for its current market value, therefore resulting in a capital loss if the allowable costs are more than this. This loss can be used to reduce gains in the same tax year or be carried forwards to reduce future capital gains. An example of this could be a cryptoasset that the developers have stopped working on and is seemingly a “dead project” .
Losing the public or private keys to a wallet containing your cryptoassets cannot be treated as a disposal for capital gains tax purposes. However, if the individual can show that there is no prospect of recovering the cryptoassets, they can file a negligible value claim in the Tax Return to claim the loss for these cryptoassets .
Finally, being the victim of theft or fraud resulting in the loss of cryptoassets is also not considered a disposal. If the individual can prove they did hold the cryptoasset at some point, yet there is no chance of recovering the cryptoasset, they can file a negligible value claim. However, those who did not receive a cryptoasset that they paid for may not be able to claim a capital loss according to the HMRC guidance .
As mentioned in the ‘Which Taxes Apply?’ section, some individuals may be classed as cryptoasset “financial traders”, meaning their profits are subject to income tax and national insurance, rather than capital gains tax as an investor. Being classified as a trader rather than investor usually results in a higher tax bill. Fortunately, HMRC has stated that the classification of cryptoasset users as traders is “likely be unusual”. Consideration of whether or not a taxpayer is engaging in financial trading is a very complex area. It is not as simple as working through the ‘Badges of Trade’  as these have been demonstrated to have limitations in the field of financial trading. The relevant considerations have been detailed in the Appendix under Financial Trading in Cryptoassets, which explores the approach HMRC would take to gather the facts of the case and summarises relevant case law on the topic.
Aside from being classified as a financial trader, there are a few other cryptoasset related activities that result in income tax liabilities. Mining income is one example of these. HMRC guidance states  that whether such activity amounts to a taxable trade (with the cryptoassets as trade receipts) depends on a range of factors such as:
degree of activity
HMRC’s broad expectation is that the receipts of miners – those who are involved in verifying new cryptoasset transactions – will most likely be within the scope of miscellaneous income. HMRC considers that for most individuals the mining activity will fall short of meeting the badges of trade , so returns are only expected to be charged to tax as trading income in exceptional circumstances .
Just as for a financial trader, the facts need to be examined and this can be complex. It is recommended advice is sought from a qualified tax professional. Please refer to the detailed guidance ‘Financial Trading in Cryptoassets’ in the Appendix, regarding the factors to be considered and how to register as self-employed with HMRC. This equally applies to a mining trader. If the mining activity amounts to a trade, the taxpayer needs to register as self-employed with HMRC and pay income tax and national insurance on the trading profits. You can register online at https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed, but it is recommended to seek the advice of a qualified tax professional before registering your cryptoassets trading business with HMRC. Please see the Appendix for details of the deadlines and penalties for not registering in time.
The trading receipts are the sterling equivalent (on the date of receipt) of the cryptoassets received. The allowable trading expenses (under the normal income tax rules for businesses) are deducted from the receipts to calculate a trading profit or loss. The tax rules for running your own business are complex. The HMRC Business Income Manual  provides lots of guidance about the kind of expenses that can be deducted. We are still awaiting guidance from HMRC on business income and expenses regarding mining. However the HMRC guidance for individuals slightly touches on this by stating that the costs for mining activities (electricity and equipment) are not allowable costs for capital gains tax purposes . This implies they may consider them to be allowable trading costs, but the position is unclear. It is considered that under normal business expense principles the cost of additional electricity used in order to mine and capital allowances on the mining equipment used should be allowable expenses, but it is recommended a qualified tax professional is consulted as the position is unclear.
If the mining activity does not amount to a trade, the sterling equivalent (at the date of receipt) of the tokens received from mining will be taxable as miscellaneous income subject to income tax . Additionally, fees received for verifying new transactions should be included within this mining income . Allowable expenses such as additional electricity used in the mining can be deducted from the income .
From 2017/18 onwards, there is a ‘Trading Allowance’ of £1,000. This is an automatic tax exemption that does not need to be claimed. Although it is called a ‘Trading Allowance’, it applies to both trading and miscellaneous income. Therefore, if the mining income for a tax year is less than £1,000, there is no tax to pay on this income and there is nothing to declare to HMRC.
If the trading or miscellaneous income is more than the £1,000 Trading Allowance, the individual can choose to simply deduct the £1,000 from their total income (with no deduction for expenses), or calculate the trading profit or net miscellaneous income under the normal rules (income less allowance expenses).
However, if the individual also has a separate self employed business (e.g. a plumber), care needs to be taken. The Trading Allowance cannot be claimed against the cryptoasset mining income if self employed expenses are being deducted from any self employed income. The deduction of the Trading Allowance cannot create a loss. For example, if the income is £600, you cannot deduct the £1,000 Trading Allowance and claim a loss of £400. In this example, the Trading Allowance is restricted to £600, so that a loss is not created.
You can elect to disapply the Trading Allowance and this could be beneficial if you have made a loss. A trading loss is much more useful than a loss under the miscellaneous income provisions as it can be used in many different ways (such as against other income or carried forwards to set against future profits from the same trade ), but HMRC have been known to challenge trading losses to deny the relief. They may either make a case that the taxpayer is not a trader, or that they are a trader, but they are not trading on a commercial basis with a view to making a profit. This means no relieving a trading loss against other income; it can only be carried forwards against profits of the same trade. A loss under the miscellaneous income provisions can only be carried forwards to reduce future miscellaneous income from the same source .
Here is an example from the ICAEW  concerning cryptoasset mining income:
Mr A is a Bitcoin miner. He mines by leaving his personal laptop running overnight, where it verifies transactions added to the blockchain. In return for his efforts, Mr A received cryptocurrency worth £2,000 in the tax year. His electricity costs increased significantly; he considers that £200 of the additional expense relates to his mining activities, giving a net return of £1,800. Mr A had a profit motive, but his minimal activity means that the actions he took fall short of meeting the badges of trade. His £1,800 profit is therefore charged to tax as miscellaneous income.
Mr A retains the Bitcoin he received in the hope it will increase in value in the future. CGT will apply to any future increase in value of the Bitcoin.
If your employer pays you in cryptoassets, the sterling equivalent at the date of receipt is taxable employment income, subject to income tax and national insurance contributions. Depending on whether those tokens are a readily convertible asset (RCA) such as Bitcoin, or not, determines how employers must handle national insurance contributions and paying income tax on your behalf .
Cryptoassets are RCAs if trading arrangements exist, or are likely to come into existence, in accordance with section 702 of the Income Tax (Earnings and Pensions) Act 2003 . Exchange tokens like Bitcoin can be exchanged on one or more token exchanges in order to obtain an amount of fiat money. On that basis, it is HMRC’s view that ‘trading arrangements’ exist, or are likely to come into existence at the point cryptoassets are received as employment income .
If an employer has a UK tax presence they must deduct and account to HMRC for the Income Tax and Class 1 National Insurance contributions due through the operation of PAYE, based on the best estimate that can reasonably be made of the cryptoasset’s value .
If an employer cannot deduct the full amount of Income Tax due from employment income they must still account to HMRC for the balance. This is called the ‘due amount’. The employee must reimburse their employer for the ‘due amount’ within 90 days after the end of the tax year. If they do not, then a further Income Tax charge and National Insurance contributions liability will arise on the employee for an amount equal to the ‘due amount’ under section 222 ITEPA 2003 .
Cryptoassets received as earnings from employment, which do not meet the definition of RCAs, are still subject to Income Tax and National Insurance contributions, but employers do not have to operate PAYE .
The individual must declare and pay HMRC the Income Tax due on any amount of employment income received in the form of cryptoassets (using the employment pages of a Self Assessment return) .
The employer should treat the payment of cryptoassets as payments in kind for National Insurance contributions purposes, and pay any Class 1A National Insurance contributions to HMRC.
Where cryptoassets are provided by a third party in connection with employment, an Income Tax charge and Class 1 National Insurance contributions liability may arise . Employers must account to HMRC for the Income Tax and National Insurance contributions due through the operation of PAYE, based on the best estimate that can reasonably be made of the cryptoassets’ value .
Any disposal after receiving cryptoassets as income is subject to the capital gains regime and there may be a taxable capital gain if there has been an increase in value of the cryptoassets .
An airdrop is when an individual receives an allocation of tokens or other cryptoassets. For example, tokens are given as part of a marketing or advertising campaign. Other examples of airdrops may involve tokens being provided automatically due to other tokens being held or where an individual has registered to become eligible to take part in the airdrop.
If airdrops are received in return for or in expectation of the individual performing a service or doing something in return (even just participating in a social media campaign) in order to qualify, the market value of the cryptoassets received should be recorded on the Tax Return as miscellaneous income, subject to income tax.
If airdrops are received as part of a trade or business involving cryptoassets or mining; the market value of the cryptoassets received should be recorded on the Tax Return as trading income, subject to income tax.
If the airdropped tokens are received without doing anything in return and are not received as part of a trade or business involving cryptoassets or mining; there is no income to declare. The market value of the cryptoassets received is pooled as the acquisition cost and the cryptoassets will be subject to the capital gains tax regime when they are disposed of.
Staking is another area of cryptoassets for which it is unclear how the proceeds should be treated for tax purposes. HMRC has not released any guidance on staking or other rewards from different consensus mechanisms. We have sought written guidance from HMRC on this and are awaiting a reply.
Although this is pure speculation, it is possible that staking rewards could be treated as savings income, as the individual is using capital accumulated to gain a return on their investment .
As already noted, the tax position regarding individuals trading and investing in CFD’s (Contract for Difference), Futures and margin trading is very unclear as there is no HMRC guidance specific to cryptoassets. We have requested written guidance from HMRC, but are awaiting a reply.
Assuming the individual is not treated as a financial trader, it is not clear if the gains or losses are to be taxed under the capital gains regime or be treated as miscellaneous income.
The HMRC Manuals sets out the tax position for Futures (which includes CFD’s) here - https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg56000p .
BIM 56100 states ‘Retail contracts for differences are financial futures, and, unless the profits are taxable as trading income, in almost every case TCGA92/S143 charges the outcomes under the capital gains regime (CG56000+). SP03/02 at https://www.gov.uk/government/publications/statement-of-practice-3-2002/statement-of-practice-3-2002#elimination-or-reduction-of-risk gives guidance on when profits or losses are to be regarded as trading income. However, this was written long before the prevalence of cryptoassets and it was probably expected that most futures would be traded via a recognised futures exchange on the HMRC approved list.
CG56004 confirms that the legislation at Section 143(1) TCGA 1992 was introduced to ensure most transactions (if not trading) are treated as capital gains rather than miscellaneous income. It applies to:
commodity and financial futures dealt in on a recognised futures exchange, Section 143(2), see CG56021. See CG56120 for a list of recognised futures exchanges, or
over-the-counter futures where one the parties is an authorised person (as defined in Section 143(3), see CG56027).
None of the cryptoasset exchanges are on the HMRC list of recognised futures exchanges. Therefore, only over the counter futures, where one of the parties is an authorised person, would seem to be subject to the capital gains tax regime. CG56027 states that ‘You may accept that any reputable financial concern is an authorised person. Any case of doubt or difficulty should be referred to Capital Gains Technical Group.’
We have asked HMRC to issue guidance to clarify which of the current cryptoasset exchanges can be regarded as an authorised person, but are awaiting a reply.
It is therefore unclear whether or not gains and losses should be treated as capital gains or miscellaneous income and the individual will need to make their own call on the matter in the absence of guidance from HMRC.
CG56100 confirms that if the transactions are taxed as capital gains ‘all debits and credits to the account, including commission and sums equivalent to interest and dividends, are brought within the computation of the net chargeable gain or allowable loss when the contract is closed out’. It is not clear if the same costs can be deducted if it is treated as miscellaneous income.
Capital gains needs reporting to HMRC if the total disposal proceeds exceed four times the annual exempt amount, or if the net chargeable gains exceed the annual exempt amount. In the current tax year 2019/20, gains need to be reported if the gains exceed £12,000, or if the total proceeds of all disposals exceed £48,000.
Gains can be reported to HMRC on the Tax Return or using the ‘Real time capital gains tax service’. The idea of the ‘Real time capital gains tax service’ is that you don’t wait until the end of the tax year to declare the gain and pay the tax. However, it is unlikely to be appropriate where there are many disposals in a tax year.
The Recap tax report provides a summary of all the relevant information to be included on your annual Tax Return. The intention is that you pass our report to your accountant and they will be able to complete the Tax Return and advise on your tax position, based on your specific circumstances.
All capital losses should be reported, as it is the only way they can be ‘claimed’ to use against future gains. Losses can be reported to HMRC on the Tax Return or by letter. The time limit for claiming capital losses is within 4 years of the end of the tax year in which the capital loss was realised.
This is reported on the Tax Return for financial trading in cryptoassets, mining traders or for miscellaneous income derived from mining or airdrops. If the total trading and miscellaneous income is less than the Trading Allowance of £1,000, there is no need to report this income.
However, if the individual also has a separate self employed business (e.g. a plumber), care needs to be taken. The Trading Allowance cannot be claimed against the cryptoasset mining income if self employed expenses are being deducted from any self employed income.
If there is a loss, it is worthwhile considering if it is better to elect to waive the Trading Allowance exemption and report the loss on the Tax Return.
This employment income is reported on the Tax Return if the cryptoassets received are not considered to be readily convertible assets (however it is not expected that many cryptoassets fall within this category). This is the position, even if the employment income is received from a third party rather than your employer.
If the cryptoassets received are considered to be readily convertible assets, the employment income should have been subjected to income tax and national insurance via PAYE. Where this is the case, it only needs to be reported on the Tax Return if there are other reasons for a Tax Return to be required (e.g. capital gains to report) or if any tax and national insurance met by the employer was not repaid to them.
If you don’t already file a Tax Return, you need to notify HMRC that you have income or capital gains to report by 5 October after the end of the tax year. You can do this only at https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-not-self-employed. They will issue you with a Notice to File a Tax Return and you should chase this if it is not received.
If you are engaged in financial trading or mining trading, you can register online at https://www.gov.uk/log-in-file-self-assessment-tax-return/register-if-youre-self-employed, but it is recommended to seek the advice of a qualified tax professional before registering your cryptoassets trading business with HMRC. You need to register a business with HMRC by the 5 October after the end of the first tax year in business. Tax years run from 6 April to 5 April. So if you started trading 8 April 2018, your first tax return will be for the year ended 5 April 2019 and you need to register with HMRC by 5 October 2019 to avoid penalties.
Regardless of whether HMRC issue the Notice to File or not, you need to submit the Tax Return to HMRC by 31 January after the end of the tax year to avoid late filing penalties. A tax year runs from 6 April to 5 April. If you made a disposal on 4 April 2019 (or started to receive income in the year ended 5 April 2019), this falls in the tax year ended 5 April 2019 and you need to notify HMRC by 5 October 2019 and submit the tax return by 31 January 2020.
Late filing penalties increase significantly over time and may be based on the tax due after 6 months.
The tax and national insurance is due for payment on the same date as the Tax Return is due for filing (31 January after the end of the tax year).
Interest is charged by HMRC on all late payments.
There are also surcharges for late payment, in addition to the interest and late Tax Return filing penalties, and they continue to grow the longer the payment is late. It can get very expensive, very quickly. The late payment surcharge is 5% of the tax outstanding at 30 days, 6 months and 12 months after the 31 January due date. A large CGT bill paid late could lead to a significant surcharge.
One of the most important messages to come from the recent HMRC guidance is the importance of keeping records of all cryptoasset activity. All of the HMRC articles speak about this because it is the easiest way to prove your acquisition costs and cryptoasset history to HMRC.
HMRC’s guidance on how to keep records states the following :
Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include:
the type of cryptoasset
date of the transaction
if they were bought or sold
number of units
value of the transaction in pounds sterling
cumulative total of the investment units held
bank statements and wallet addresses, if needed for an enquiry or review
It is important for individuals not to rely solely on exchanges to keep records of their data as there have been many instances of dead exchanges that old users cannot obtain their transaction history from. Therefore, exporting a copy of your data from the exchanges and wallets that you use on a regular basis is good practice.
Additionally, keeping this data even after submitting tax returns for the relevant year is vital. This will help with any HMRC compliance checks, allow the calculation of pool values in future tax returns and allow cryptoasset users to adapt to any changes in HMRC’s cryptoasset tax guidance.
We hope that you found this guide helpful – If you have any more questions, feel free to reach out to us on twitter @recap_io
Disclaimer: This guide is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this guide.
If the individual buying and selling the cryptoassets is conducting a trade then Income Tax and National Insurance will be applied to their trading profits. In theory, trading losses can be relieved against a trader’s other income, however it has to be argued that the taxpayer was trading on a commercial basis, with a view to realising profits. You will see below that a number of taxpayers have argued they were trading on a commercial basis to benefit from loss relief, but only the Akhtar Ali case succeeded in the Courts.
Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.
If it is considered to be financial trading, then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business. The individual will need to be registered as a sole trader business with HMRC for Self Assessment and file tax returns. The tax rules for running your own business are complex. The HMRC Business Income Manual  provides lots of guidance, but it is recommended you seek the help of a qualified tax professional.
As with any activity, the question of whether cryptoasset activities amount to trading depends on a number of factors and the individual circumstances. Whether an individual is engaged in a financial trade through the activity of buying and selling cryptoassets will ultimately be a question of fact. It’s often the case that individuals entering into transactions consisting of buying and selling cryptoassets will describe them as ‘trades’. However, the use of the term ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes.
A business trading in cryptoassets would be similar in nature to a business trading in shares, securities and other financial products. Therefore the approach to be taken in determining whether a trade is being conducted or not would also be similar, and guidance can be drawn from the existing case law on trading in shares and securities.
More information on the existing approach and case law for share transactions and financial traders can be found in the HMRC business income manual (BIM56800 https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim56800).
One approach to determine if there is financial trading is to consider the ‘badges of trade’ (see BIM20205 ). However, it is important to be aware of the limitations of this approach in considering an activity of buying and selling shares and other financial instruments (and therefore cryptoassets).
The ‘badges of trade’ emerged from a Royal Commission of 1955. Two members of the commission produced minority reports in which they expressly identified share transactions as being ones where a strict application of the badges could produce the wrong answer.
For example, the presence of a large number of purchases and sales may often be used to support an argument that an activity amounts to trading, but this has no particular relevance to share transactions. In Clarke v Trustees of British Telecom Pension Scheme & Others  72TC472, Robert Walker LJ said: ‘Frequency cannot by itself be decisive, since an investor may change his investments frequently (as the Trustees did) without the investments losing their character.’
Nor is the presence or lack of a trading organisation significant. As Lord Wilberforce remarked in Ransom v Higgs  50 TC 1, ‘All depends on what you organise.’ No special organisation is needed to buy and sell shares, nor do they need any alteration before being sold. In any event, large investment entities such as pension funds exhibit an obvious level of organisation, but this does not transform them into trading entities.
The limitation of the badges of trade as a whole was considered by Oliver J in Salt v Chamberlain  53TC143 at page 154: ‘…I doubt whether the question whether in any given case a person is or is not carrying on a trade is capable of solution by the application of a logical progression of propositions culled from decided cases. The question is, I think, one of overall impression.’
In the Salt case it was held that there was not a trade, despite a number of the badges being present.
Key areas that HMRC will explore when considering if an individual is a financial trader are set out below.
The experience of the person carrying on the activity, particularly if that person is, or ever has been, regulated by the Financial Conduct Authority (FCA) or its predecessor the Financial Services Authority (FSA).
The reason for commencing the activity, particularly if the person had little or no previous experience.
How the activity was funded initially.
Whether any steps were taken to notify the commencement of a trade for Income Tax and National Insurance purposes.
How precisely the activity is carried out and whether this is done in a commercial way. If appropriate, identify all the steps in each type of transaction.
The profit-making strategy. Review business plan if drawn up. If one was not prepared on the basis that third-parties were not involved, you would still expect the person to have some idea of how they proposed to make a profit. How realistic was that plan? What arrangements were put in place to review the performance of the activity and, if such a review was carried out, what changes, if any, were implemented? Was a limit placed on the amount of losses that would be tolerated?
Whether a strategy was put in place to limit losses. This might be a ‘stop-loss’, which effectively caps losses at a certain level, or a hedging strategy in case the market moves against expectations.
The type of cryptoassets bought and sold. The ease (or lack of) with which the items can be bought and sold may be relevant to the overall decision.
Whether the person deals in a wide range of cryptoassets. A person who buys only particular cryptoassets, or operates in a narrow area of the market, may be using experience but may also be exposed to greater risk of adverse market movements which a regulated dealer would be able to limit. It might even cause the person to cease dealing for a time in contrast to a regulated dealer who seeks to make money from any market situation (see BIM56820).
Whether the person actually uses any specific acumen and experience in the transactions carried out. It may be relevant in this connection whether the person uses an ‘execution only’ service from the Exchange (where the Exchange simply carries out the client’s instructions), or whether more detailed financial advice is received commensurate with operating a portfolio of investments. If use is made of any ‘robot’ program, what influence does the person have on how the program operates?
What research does the person undertake prior to carrying out any transactions? For example, does he act on a tip from the financial pages of a newspaper, or has he access to expensive real-time information services? Does he undertake a thorough examination of the cryptoassets he might contemplate buying? Remember that only by carrying out actual transactions can any research, however extensive, bring the person profits, so compare the stated research with the number and frequency of transactions.
The number and frequency of transactions.
The length of time for which cryptoassets are held. Are they bought and sold within minutes, or retained for some months or even longer? Be aware that, in some cases, transactions may be rolled over on a number of occasions, so they appear to be held long-term, but are in fact conceptually different from a long-term investment.
The time devoted to the activity. Consider how the person’s other commitments are likely to affect the amount of time available to devote to dealing.
Compare and contrast the activity with any dealing in cryptoassets prior to the date on which trading is said to commence. There is a discussion at BIM56930 on whether particular activities amount to a separate trade or are bound up with an existing investment activity. Identify the grounds for which the person asserts that the activity now amounts to a trade.
Whether a service is provided to third parties.
The extent of the records kept or provided by Exchanges. Where transactions are carried out on a margin there will be specific documentation in relation to this between the Exchange and the individual.
Whether there is any fiscal motive for undertaking particular transactions.
Whether there is any non-trading motive for carrying on the activity, such as a hobby interest.
An activity of buying and selling shares and other financial instruments undertaken by an individual will normally amount to investment or speculation falling short of trading unless there are factors which take the case ‘out of the norm’ (see BIM56850).
Four cases where such activities have been considered are:
Salt v Chamberlain  53TC143,
Wannell v Rothwell  68TC719, and
Manzur v HMRC  UKFTT 580(TC).
Ali v HMRC  UKFTT 8 (TC).
It was found that Mr Salt was not trading by the Commissioners and then upheld by the High Court.
Mr Salt was a mathematics graduate who used his knowledge of computers to forecast the movements in share prices. In the period 11 December 1968 - 31 March 1973 he entered into approximately 200 transactions for the purchase and sale of securities, which included put and call options and settlements at the end of an account for balances only. He used his own funds as well as borrowings from the bank and against life assurance policies.
Mr Manzur was a retired surgeon. He used his own savings to begin acquiring stocks and shares. He made between 240 and 300 trades in a year using an online stockbroker. Some of the shares were turned over very quickly but others were retained for six months or more.
The tribunal held that Mr Manzur’s buying and selling amounted to the management of a portfolio of investments rather than trading. They upheld the view in Salt v Chamberlain that the badges of trade were of limited value and said there was no definitive checklist which could be used to say whether someone was trading or not. The number and frequency of transactions, and the short-term nature of the holdings alone did not establish trading. Other factors taken into account were:
the time spent on the activity (about two hours a day);
the fact that Mr Manzur did not entirely rely on his own expertise but used the advice of brokers;
that the activities were not characteristic of established share dealers, for example Mr Manzur had no customers and was dependent on market movements alone to make a profit.
Mr Wannell had previously worked for a commodity futures dealer as a trader prior to the commencement of his activity. His duties had included advising clients on long-term investments and short-term trading opportunities in commodity futures and options. He had obtained qualifications relevant to his duties and, in the course of his own activity, had access to market reports and analysis but not a full screen service. All the transactions were placed with a broker. There were 11 purchases and sales of commodities between May and October 1986 and 46 purchases and 49 sales of shares between October 1985 and August 1987. He dealt on his own account and there were no customers.
The Deputy Special Commissioner said:
‘The essential point in the present case is that of organisation. Was the Appellant, doing two or three deals a month from home through brokers, but doing them with the benefit of experience, training and contacts which he had, organised in a way that a trader could be said to be organised? The case is very close to the borderline, and if the only question I had to decide were whether the Appellant was trading, I might be inclined to give him the benefit of the doubt and find that he fell, by a hair’s breadth, on the trading side of the dividing line.’
This case considered not only the question of whether Mr Wannell was trading but whether he was trading commercially for the purposes of relief for losses (see BIM85705), and the Deputy Special Commissioner concluded that:
‘a case which is so close to the trading borderline because of its lack of commercial organisation is bound to be on the wrong side of the [loss relief] borderline.’
When this case came before the High Court, Robert Walker J found that the Deputy Special Commissioner must be taken to have found that Mr Wannell was trading, but also that he had had sufficient evidence before him to come to the conclusion that the activity was not carried on commercially, so the losses could not be set off against general income. There is more information on losses in this context at BIM85705
It was held that buying and selling shares constituted a trade on a commercial basis, mainly on the basis that the individual taxpayer had bought the shares with the intention of selling them at a profit.
The appellant bought and sold publicly listed shares in significant volumes with the intent of making a profit based on short term movements in the price of the shares. He held the shares for short periods of time. The volume of his share transactions waxed and waned over the tax years in question but throughout these years he was engaged in an endeavour to make money from short term dealing in shares (another word for which, as used in the case law discussed below, is “speculation” in shares).
The total number of transactions carried out by the appellant in six of the seven tax years in question was as follows:
|Yearly||Weekly (average)||Daily (average)|
Whether this endeavour yielded profit or loss over a tax year was entirely dependent on the appellant's success in anticipating short term movements in the prices of shares – the appellant did not, in the tax years in question, undertake “hedging” transactions which could have counterbalanced the effect of other transactions he was undertaking.
The appellant was self-taught in this field. He had experience of buying and selling shares going back to the 1990s, and in 2000 he made a considerable profit. He conducted regular research into the stock market. His research and experience informed his strategies for profiting from short term movements in the price of shares. He had never worked for a financial institution and had no formal qualifications or regulatory permissions relating to his share activities (and none were required).
The appellant conducted his share activity with minimal expense and formality. He carried it on alongside his pharmacy business, spending up to 40 hours a week on his share activities when he was hiring locums for the pharmacy. He engaged no staff or outside consultants for his share activity. He used an office above the pharmacy. He had no written business plan, drew up no separate accounts, and had no formal process to review the performance of his share activities.
The appellant continued his share activities, despite making overall losses in each of the seven tax years in question, because he believed he was all the time getting better at anticipating short-term price movements, and so would generate net profits. The appellant funded his share activity himself, from what he called his “riskable funds”. This meant that he could sustain the losses he incurred in the tax years in question – but there was an upper limit on the money he was prepared to put into the endeavour, as he did not want to put at risk certain key personal assets such as his pharmacy business, his pension, and certain long term investments.
The FTT’s starting point was that Mr Ali’s activities bore classic hallmarks of ‘trading’. Over an extended period of time, he had bought assets with the intention of selling them on at a profit. Furthermore, four of the badges of trade (the length of the period of ownership, the frequency of similar transactions, the circumstances that were responsible for the realisation, and motive) pointed firmly towards trading.
However, Salt v Chamberlain  STC 750 was authority for the proposition that the activity of speculating in shares can look like trading and yet not constitute a trade, because it really consists of ‘gambling’. The FTT noted that Mr Ali was self-funded, so that he had no external stakeholders and could engage in gambling transactions if he so chose. However, his business plan (although unsophisticated) and the fact that he pursued it in a sufficiently organised manner pointed away from gambling. Mr Ali had therefore been trading. Similarly, the fact that his endeavour had been unsuccessful did not make it uncommercial and it was clear that he had aimed to profit.
In Salt v Chamberlain, it was held that all share transactions are capital in their nature unless they are undertaken by a properly registered share dealer. Therefore, if a private individual (not a share dealer) bought and sold shares many times, it is thought he could never have the badges pinned on to those transactions. Such profits would be taxable as capital gains. Therefore, an individual casually dealing in shares could not set any resulting losses against income, even if the activity constituted trading.
Despite this seemingly definitive case, taxpayers continue to test the principle with reference to the other badges of trade. For example, in Manzur, the taxpayer failed to convince the Court that his share dealing was a trade.
It can been seen above that the decision in Wannell v Rothwell was borderline and although it was decided as trading, the position was far from clear cut. He was not considered to be trading on a commercial basis and therefore he was not permitted to offset his losses against other income.
However, in Akhtar Ali v HMRC, it was held that buying and selling shares constituted a trade on a commercial basis, mainly on the basis that the individual taxpayer had bought the shares with the intention of selling them at a profit. He was permitted to offset his losses against other income. The tribunal stressed that the following factors pointed towards a trading activity; the short length of ownership and high frequency of similar transactions, the circumstances that were responsible for the realisation, the profit motive and the fact that the activity was carried out in a sufficiently organised manner.
Disposals made to a connected party (other than a spouse/civil partner) are deemed to be made at market value. Any actual consideration given by the connected party for a cryptoasset is ignored. Instead the measure of the disposal proceeds used in the capital gains calculation is the market value of the cryptoasset disposed of, at the date of disposal.
If there is a gain, it is simply aggregated with the other gains in the year.
If it is a loss, then it cannot be set against other gains in the year. This is called a ‘clogged loss’. It can only be set against gains to the same connected person at a time when they remain connected:
in the same tax year; or
carried forward to offset against future gains made on disposals to the same person. These can be gains of any type, such as shares or property; not just cryptoassets.
For the purposes of capital gains tax, an individual is connected with all of the following:
his spouse or civil partner
his ‘relatives’ (defined as ancestors such as one’s parents or grandparents, lineal descendants such as children or grandchildren, and brothers or sisters)
the spouses or civil partners of his ‘relatives’
the ‘relatives’ of his spouse or civil partners and the spouses or civil partners of these relatives
his business partners, their spouses / civil partners and their ‘relatives’
A taxpayer is not connected with his uncles, cousins, nieces or nephews, as they are not ‘relatives’.
Relief from capital gains tax is given in respect of disposals of assets to a charity, a community amateur sports club (CASC), or to a body for a National Purpose (ie British Museum); when the recipient pays less than the allowable CGT costs of acqusition for the cryptoasset, providing it is not a tainted donation.
Where this relief applies, the disposal is treated as being made for no gain and no loss. Therefore the disposal proceeds are deemed to equal the allowable CGT costs.
There is no relief if it is a ‘tainted donation’ or when the recipient pays the donor more than the allowable CGT costs.
Therefore, the recipient can pay an individual donor up to the acquisition cost of the cryptoasset and the donor will not realise a capital gain on the disposal (as it is treated as a disposal at no gain and no loss). So it does not need to be an outright gift to the charity.
If the consideration given by the recipient, though not full market value, is nevertheless greater than the allowable costs, the disposal is treated as made for the actual consideration given (rather than the full market value at the date of disposal) and the resultant capital gain will be chargeable.
Relief from CGT is not available where a person makes a 'tainted donation', or any associated donation.
In order to be tainted, a donation must meet all three conditions below:
The donor, or a person connected with him (both known as a linked person), makes arrangements (whether before or after the donation is made) and it is reasonable to assume that the donation and arrangements would not have been made or entered into independently of each other
The main purpose, or one of the main purposes, of entering into the arrangements is that the linked person (other than a charity) obtains a financial advantage either directly or indirectly from the charity that received the donation, and
The donor is not a qualifying charity-owned company, or a relevant housing provider linked with the charity to which the donation is made.
For ease of reading, all references below to spouses, also includes civil partners; because civil partners are considered the same as spouses for tax purposes.
When a cryptoasset is transferred between two spouses, there is a disposal by the transferor spouse and an acquisition by the transferee spouse for capital gains tax purposes.
The disposal is deemed to take place at ‘no-gain and no-loss’ provided the couple is:
married or in civil partnership, and
living together during the tax year
In Scotland, a ‘common-law’ marriage is recognised as a legal marriage once there has been a declaration before the Court of Session. Disposals between such a couple are also deemed to take place at no-gain and no-loss.
A couple does not have to be physically living in the same house to be ‘living together’. As long as the marriage or civil partnership has not broken down, the couple are treated as living together for capital gains tax purposes even if they have separate homes.
This disposal proceeds used in the capital gains calculation is a balancing figure and it is equal to the costs of acquisition, plus enhancement expenditure, plus incidental costs of sale.
The transferee spouse’s base cost is the deemed proceeds figure used in the capital gains calculation. This is the deemed cost of acquisition for the transferee spouse.
Any consideration paid by the transferee is ignored and the no-gain and no-loss rules are still used. There is nothing in the legislation to disapply the no-gain and no-loss rules where the spouses are married and living together but one spouse is non-resident in the UK.
This no-gain and no-loss treatment applies until the end of the tax year in which the couple separate. Individuals who are married or in civil partnership are treated as living together unless they separate:
under an order of a court
by a deed of separation, or
in circumstances where the separation is likely to be permanent
For example, if a couple permanently separate during the 2018/19 tax year, any transfers between them up until 5 April 2019 will take place at no-gain and no-loss. As the couple does not live together in 2019/20, any transfer of assets must take place at market value since they are ‘connected persons’. Any consideration paid is ignored. The fact that the couple may still be legally married is irrelevant.
The no-gain and no-loss rule does not apply where:
the transfer is made on the death bed (the transferee spouse is treated as a legatee)
the asset transferred formed part of the trading stock of the transferor spouse
the asset transferred forms part of the transferee spouse’s trading stock
Transfers to and from trading stock are deemed to take place at market value. This would be applicable if an individual is engaging in financial trading in cryptoassets and transfers the assets into or from the trading stock of this business.
This is a complex area and we recommend you seek help from a qualified tax professional if this may be applicable to you.
The transfer of the asset between spouses has to be reported on the transferor spouse’s Tax Return if they have other chargeable gains that need reporting on the Tax Return. This would be the case if the total disposal proceeds exceed four times the annual exempt amount, or if the net chargeable gains exceed the annual exempt amount. In the current tax year 2019/20, gains need to be reported on the Tax Return if the gains exceed £12,000, or if the total proceeds of all disposals exceed £48,000. All capital losses should be reported, as it is the only way they can be ‘claimed’ to use against future gains. A detailed calculation also needs to be submitted, as with any other disposal.
However, even if no reporting is required, it is still good practice to disclose the no gain and no loss transfer on the Tax Return of both the transferor and transferee spouse as it may help avoid a later HMRC investigation.