UK tax authority publishes new guidance for cryptocurrency holders

The UK tax authority (HMRC) published updated guidance on cryptocurrency operations.

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The new document consolidates guidance for both businesses and individuals. It marks the first time it addresses loans secured by cryptocurrency and staking.

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According to the department’s clarification, loans secured by cryptocurrency are a form of credit arrangement and are regulated under standard rules.

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However, when borrowing cryptocurrency between a lender and a borrower, there are no traditional credit relationships because it is not a cash loan and no cash transaction occurs. It means that cryptocurrencies are not treated as fiat currencies and therefore cannot be subject to standard regulation.

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For businesses, staking, if the coins are subsequently sold, is taxed as capital gains or corporate income tax. If the purposes are not trading-related, such coins are treated as other income.

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Individuals disposing of crypto assets are also liable for capital gains tax.

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Overall, HMRC adheres to the framework described in 2019. Under this regime, the following activities are taxable:

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• purchase/sale of cryptocurrencies;

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• exchange of cryptocurrencies for other assets, including other cryptocurrencies;

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• mining;

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• sale of goods and services for cryptocurrency.

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The amount of tax depends on income and expenditure and the company’s net profit. HMRC will determine the tax treatment for each return on a case-by-case basis. Depending on the circumstances, a business will pay one or more taxes, including:

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• income tax;

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• capital gains tax;

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• corporation tax;

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• stamp duty;

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• VAT;

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• National Insurance contributions.

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Most mining activities are treated as taxable events. If mined coins are not traded, they are treated as other income.

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Individuals will be liable for income tax and National Insurance contributions on cryptocurrencies they receive as remuneration for mining, validating transactions and airdrops. Pension fund contributions in digital assets are prohibited.

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HMRC also states that merely owning digital assets and using them is not illegal in the United Kingdom. The department does not regard cryptocurrencies as a means to evade taxes or engage in other illicit activities.

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The tax authority will continue to update the document.

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Earlier, the previous guidance for business cryptocurrency operations was published in November 2019. It classified exchange-traded cryptocurrencies as goods.

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In late 2020 the UK introduced a temporary registration regime for crypto businesses, awaiting regulatory approval. It will run until 9 July 2021.

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In January 2021, the Financial Conduct Authority warned of the high risks of investing in cryptoassets.

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