HMRC has been very active in crypto taxation. It has been widely reported in the national press that HMRC have been issuing ‘nudge’ letters to taxpayers to ensure that they have been correctly reporting any taxable profits derived from crypto assets. ‘Nudge’ letters will mostly be driven by information obtained from crypto currency exchanges.
Any form of activity relating to the exploitation of crypto currencies and their exchange into fiat currency (government backed) is potentially subject to a range of taxes (e.g. Capital Gains Tax, Income Tax, Corporation Tax, VAT).
HMRC have issued a substantive manual on their view of the taxation of crypto assets (see Tax on cryptoassets – GOV.UK (www.gov.uk)). There is also related guidance for individuals when they sell or receive crypto assets (see Check if you need to pay tax when you sell cryptoassets – GOV.UK (www.gov.uk) and Check if you need to pay tax when you receive cryptoassets – GOV.UK (www.gov.uk)).
HMRC is usually required to give notice of a tax enquiry for an individual by the first anniversary of the date on which a self-assessment tax return has been filed. Although the enquiry window may be extended if the return was filed late or was amended. It is also possible for HMRC to investigate a taxpayer if they have made a discovery of a potential insufficiency of tax for a particular tax year (i.e. failure to correctly to declare crypto related receipts).
HMRC’s starting position is that an individual or company will usually hold crypto assets as an investment. Accordingly, if the proceeds of any disposal are capital then they will be subject to Capital Gains Tax in respect of any chargeable gains; or Corporation Tax for a company. However, individuals will be liable to pay Income Tax and National Insurance contributions on crypto assets which they receive from their employer as a form of non-cash payment for their services. HMRC also view receipts from mining, transaction confirmation or airdrops as being of an income nature (see CRYPTO21150 – Cryptoassets Manual – HMRC internal manual – GOV.UK (www.gov.uk)).
If crypto assets are exploited as a trade then any profits will be taxed on an income basis, with trading profits computed by reference to accounting principles and then adjusted for any specific tax deductions permitted by the tax legislation. Whether a ‘trade’ is being carried on is not a straight forward question to answer. The question whether an activity is a trade becomes a matter of degree, of frequency, of organisation, even of intention. If a trade is carried on and losses are incurred, then these are usually capable of being utilised on a more generous basis than capital losses to reduce a tax bill.
HMRC will consider each case on the basis of its own facts and circumstances. The correct tax treatment for any crypto exploitation will turn on an understanding of the relevant legislation and case law, which will be applied to the relevant facts and contractual terms relating to the use and exploitation of the crypto assets.