Cryptocurrency Tax In The UK: What You Need To Know
Guidance on cryptocurrency tax in the UK can often seem unclear to new investors. It’s still an unfamiliar area for many.
Cryptocurrency’s origins date to 1983, but it has only recently hit the mainstream. Now, cryptocurrency investments are exploding – and so are queries about crypto tax in the UK.
Are you a crypto investor making substantial gains from your investments? If so, now is the time to look into accounting and cryptocurrency tax in the UK. If you’re not sure where to start, our blog is here to clear up the regulations.
Read on to see the latest UK cryptocurrency tax and accounting guidelines.
Accounting for cryptocurrencies
Currently, neither the IFRS (International Financial Reporting Standards) nor UK GAAP (Generally Accepted Accounting Practice) specifically reference accounting for cryptocurrencies.
However, the ICAEW (Institute of Chartered Accountants in England and Wales) have had their say. In 2018 they published a technical note on the subject that suggested potential accounting treatments of cryptocurrencies under FRS 102. This is the principal accounting standard in the UK financial reporting regime.
ICAEW stresses considering the business model and what the entity intends to do with the cryptocurrencies held. This will be the starting point for determining an appropriate accounting treatment.
In their view, cryptocurrencies cannot be considered cash. This is because crypto is not a legal tender like cash. It is also subject to significant risk of change in value – contrary to the definition of cash under FRS 102.
They have also ruled out the possibility of treating cryptocurrencies as financial instruments. As they are not cash nor any equity instrument, they do not give rise to a financial asset of an entity.
But if cryptocurrencies are purchased and sold as part of an entity’s ordinary course of business, they may be treated as inventories. They will be valued at lower cost or Net Realizable Value and will be subject to impairment.
There are stringent criteria for investments in cryptocurrencies to be treated as trading. Businesses would only buy and sell cryptocurrencies under the necessary conditions in ‘exceptional circumstances.’
This brings us to the most viable and widely accepted option – accounting for cryptocurrencies as intangible assets.
Cryptocurrencies as intangible assets
FRS 102 defines an intangible asset as:
‘An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
- It is separable, i.e., capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability;
- Or (b) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations’
Cryptocurrencies fit this definition perfectly. They do not have any physical substance and are separately identifiable from the entity. They are also saleable in cryptocurrency exchanges.
FRS 102 gives two possible policy choices if accounting for cryptocurrencies as intangible assets:
- If accounting under cost model, cryptocurrencies should be presented at historical cost.
- If recording under the revaluation model, it should be carried at fair value. Any change in fair value should be recognised in the revaluation reserve.
Both models will be subject to amortisation and impairment review.
However, to use the revaluation model there must be an active market – which isn’t true for some cryptocurrencies. In these cases, the cost model would be more justifiable.
Cryptocurrency tax in the UK
As with accounting, there is currently no specific HMRC cryptocurrency tax legislation.
In December 2019, HMRC issued internal guidance on taxing cryptocurrency transactions. However, this HMRC cryptocurrency tax guidance comes without any actual legislation underpinning it.
As with ICAEW, HMRC regards cryptocurrencies as intangible assets. A joint report from the Treasury, the Financial Conduct Authority and the Bank of England has said that cryptocurrencies are not currency.
They are too volatile to be used as a good store of value, are not widely accepted as a means of exchange and are not used as a unit of account.
HMRC says it is important to distinguish between trading and non-trading activity. This distinction will affect the treatment of cryptocurrency in UK tax law.
To decide which applies, they suggest the same approach used for trades in shares, securities and other financial products.
HMRC believes businesses will rarely meet the criteria for cryptocurrency tax to treat activity as trading. However, there are occasions where it could apply.
For example, cryptocurrencies generated by ‘mining’ activities might be considered trading activity for tax purposes. Note, though, that you should always get advice from HMRC for specific circumstances.
Capital gains tax on cryptocurrency in the UK
If transactions in cryptocurrencies are non-trading, they are subject to capital gains tax at disposal. This is true for both individuals and businesses. For individuals, this will also need to be reported in their self-assessment tax return.
No tax will be due for holding cryptocurrencies without disposal. However, exchange of one cryptocurrency for another will also be considered disposal. Tax on this cryptocurrency exchange in the UK will include capital gains tax.
If activities are considered trading, they will face different cryptocurrency tax in the UK. For individuals, income tax supersedes capital gains tax and applies to profits. For companies, profits (or losses) from cryptocurrency trading are part of the trading profit rather than a chargeable gain.
HMRC also suggests what cost you can deduct from disposal proceeds to calculate capital gain. See the full HMRC guidance here.
Conclusion: accounting and cryptocurrency tax in the UK
Cryptocurrency tax in the UK is still an emerging area. The guidance provided by regulators is only at an initial stage, and will no doubt evolve over time.
Anyone holding cryptocurrencies should ensure they work with professional experts. This team should be aware of the latest updates on the treatment of cryptocurrency in tax in the UK.
If you’re looking for professional guidance, please don’t hesitate to contact us. Our expert crypto accountant UK team can take care of your cryptocurrency tax and accounting concerns, so you can focus on the latest investment that’s about to take off.