Existing tax laws and principles apply to cryptoassets acquired, held and disposed of by individuals and businesses in the same way as they do to other assets. HMRC first published guidance as early as 2014 and the current guidance can be found in the Cryptoasset Manual – while this guidance is perhaps the most detailed from any tax administration, it does not cover all circumstances. 

Taxation of individuals

Individuals can, in principle, be within the scope of taxation if the return on the cryptoassets is received under one of the following heads: 

Employment income

Cryptoassets may be taxable as employment income if received in connection with an employment relationship. National insurance contributions (NIC) may also be payable if the cryptoasset is a readily convertible asset (see CRYPTO21100).

Trading income 

HMRC’s expectation, as stated in its manual at CRYPTO20050, is that it would be “unusual” for individuals to be “running a business which is carrying on a financial trade in cryptoassets”. 

Miscellaneous income 

Where tokens are received, which are income in nature, but where the activity undertaken falls short of trading and does not arise from an employment relationship, the income will be taxable as miscellaneous income (s688, Income Tax (Trading and Other Income) Act (ITTOIA) 2005).

Capital gains

Passive investors are often within the scope of capital gains tax (CGT). CGT commonly applies to gains or losses made on the disposal of tokens that were purchased from a third party, or on an eventual disposal of tokens that were originally received as income (and taxed as such), but which were retained as an investment. Chargeable disposals can occur whenever tokens are disposed of, whether or not cash is received, such as when one cryptoasset is exchanged for another. An ICAEW TAXwire article explains other situations in which a gain may arise. 

International matters

Returns from cryptoassets are taxed in the UK using sterling values. Values must be converted into sterling using the usual conversion rules (CRYPTO40100). Where situs is relevant, HMRC considers that a cryptoasset that is distinct from any underlying asset should be taxed as though it is sited where the beneficial owner is resident (CRYPTO2260). Broadly speaking, this means cryptoassets held by a UK resident individual are always treated as sited in the UK for tax purposes. 

Business

The businesses section of HMRC’s manual covers all businesses, rather than being corporation tax focused. Taxation is based on the activity being conducted by the business, as it can acquire tokens in a number of different ways, such as for investment, from receipts, or mining. 

Approach to taxation

For corporation tax, HMRC’s guidance primarily considers the application of four corporation tax-charging provisions in relation to cryptoassets:

• Trading income – in line with the badges of trade, profits from cryptoassets as part of a trade or significant mining activities may be taxable (CRYPTO40150). 
• Loan relationships – cryptoassets typically fall outside loan relationship rules as they are not considered money or representative of a creditor-debtor relationship. 
• Intangible fixed assets – exchange tokens held as intangible fixed assets for accounting and corporation tax purposes must be acquired or created for use on a continuing basis in the course of the company’s activities.
• Chargeable gains – the chargeable gains rules will apply if returns are not otherwise charged to corporation tax, with specific ‘pooling rules’ for disposals and acquisitions. 

Venture capital schemes

No specific rules apply, however schemes such as the enterprise investment scheme apply to share investments in cryptoasset-related companies if the usual conditions are met. 

Paying employees

As noted above, for employee remuneration, income tax and NIC are due on the value of cryptoassets considered ‘money’s worth’. If the cryptoasset is a readily convertible asset, both employee and employer NIC are payable, and pay as you earn (PAYE) must be operated. 

Summary 

The taxation of cryptoassets continues to be a developing subject as the sector evolves, and the cryptoasset manual is a start. However, this is becoming increasingly outdated as it has not been updated to reflect recent developments. Agents will need to return to first principles to determine if an event is taxable.

Further reading

TAXguide 01/2024: Taxation of cryptoassets for individuals 

TAXguide 02/2024: Taxation of cryptoassets for businesses

A longer version of this article appeared in TAXline, the ICAEW Tax Faculty members’ content hub. The TAXline article was written by members of ICAEW’s digital assets working party. The working party has also published articles in TAXline on the VAT and international tax issues of cryptoassets.