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This means a person who holds exchanges tokens is liable to pay UK tax if they are a UK resident and carry out a transaction with their tokens which is subject to UK tax. When considering the location of an intangible asset, the courts will generally look at the nature of the asset to find a suitable comparison. For Capital Gains Tax, sections and A of the Taxation of Chargeable Gains Act provide statutory rules for determining when particular types of assets will be in the UK, but these are unlikely to apply to exchange tokens in most cases.
For Inheritance Tax, common law is relevant to the extent that Double Taxation Agreements do not determine the location section of the Inheritance Tax Act Using the residency of the beneficial owner of the exchange tokens to determine the location gives a clear, logical, predictable and objective rule which can be easily applied.
If an exchange token is co-owned between 2 or more beneficial owners then section C Taxation of Chargeable Gains Act applies for Capital Gains Tax. If one or more of the co-owners are UK resident, this will not affect the location for those co-owners who are not UK residents.
HMRC taxes cryptoassets based on what the person holding it does. If the holder is conducting a trade then Income Tax will be applied to their trading profits. 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 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. As with any activity, the question 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. A trade in cryptoassets would be similar in nature to a trade 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 BIM Mining will typically involve using computers to solve difficult maths problems in order to generate new cryptoassets. Whether such activity amounts to a taxable trade with the cryptoassets as trade receipts depends on a range of factors such as:.
If the mining activity does not amount to a trade, the pound sterling value at the time of receipt of any cryptoassets awarded for successful mining will be taxable as income miscellaneous income with any appropriate expenses reducing the amount chargeable. The other taxable income: HS Self Assessment helpsheet has more information about miscellaneous income. If the individual keeps the awarded assets, they may have to pay Capital Gains Tax when they later dispose of them.
Fees or rewards received in return for mining for transaction confirmation are also chargeable to Income Tax, either as trading or miscellaneous income depending on the:. If the individual receives cryptoassets as payment for the services provided then any increase in value from the time of acquisition will either give rise to a chargeable gain on disposal for Capital Gains Tax purposes or, in the case of a trade, get taken into account in computing any trading profits.
An airdrop is where someone receives an allocation of tokens or other cryptoassets, for example as part of a marketing or advertising campaign in which people are selected to receive them. 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 tokens, typically, has its own infrastructure which may include a smart contract, blockchain or other form of DLT that operates independently of the infrastructure for an existing cryptoasset. Income Tax will not always apply to airdropped cryptoassets received in a personal capacity. Airdrops that are provided in return for, or in expectation of, a service are subject to Income Tax either as:.
Where changes in value get brought into account as part of a computation of trade profits Income Tax will take priority over Capital Gains Tax. An individual who is trading may be able to reduce their Income Tax liability by offsetting any losses from their trade against future profits or other income.
If profits from activities are taxable as miscellaneous income, losses may be able to be carried forward to later years. More information on this can be found in helpsheet HS other taxable income.
HMRC would expect that buying and selling of cryptoassets by an individual will normally amount to investment activity rather than a trade of dealing in cryptoassets. In such cases, if an individual invests in cryptoassets they will typically have to pay Capital Gains Tax on any gains they realise.
Individuals need to calculate their gain or loss when they dispose of their cryptoassets to find out whether they need to pay Capital Gains Tax. If cryptoassets are given away to another person who is not a spouse or civil partner, the individual must work out the pound sterling value of what has been given away. For Capital Gains Tax purposes the individual is treated as having received that amount of pound sterling even if they did not actually receive anything.
If Income Tax has been charged on the value of the tokens received, section 37 Taxation of Capital Gains Act will apply. Any consideration will be reduced by the amount already subject to Income Tax. If an individual donates cryptoassets to charity, they will not have to pay Capital Gains Tax on them.
This does not apply:. If the mining amounts to a trade for tax purposes the cryptoassets will initially form part of trading stock. If these cryptoassets are transferred out of trading stock, the business will be treated as if they bought them at the value used in trading accounts.
Businesses should use this value as an allowable cost in calculations when they dispose of the cryptoassets. HMRC believes cryptoassets fall within this description, meaning they must be pooled. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss.
Individuals must still keep a record of the amount spent on each type of cryptoasset, as well as the pooled allowable cost of each pool. Victoria will be allowed to deduct a proportion of the pooled allowable costs when working out her gain:.
If the special rules apply, the new cryptoassets and the costs of acquiring them stay separate from the main pool. The gain or loss should be calculated using the costs of the new tokens of the cryptoasset that are kept separate. If the number of tokens disposed of exceeds the number of new tokens acquired, then the calculation of any gain or loss may also include an appropriate proportion of the pooled allowable cost. Melanie holds 14, token B in a pool.
The 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:. Melanie still holds a pool of 10, token B. 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. 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 numbers 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. This means that section 43 Taxation of Capital Gains Act will apply. 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 pool for the:. If an individual holds cryptoassets through an exchange, the exchange will make a choice whether to recognise the new cryptoassets created by the fork.
New cryptoassets can only be disposed of if the exchange recognises the new cryptoassets. If the exchange does not recognise the new cryptoasset it does not change the position for the blockchain, which will show an individual as owning units of the new cryptoasset. HMRC will consider cases of difficulty as they arise. Costs must be split on a just and reasonable basis under section 52 4 Taxation of Capital Gains Act HMRC does not prescribe any particular apportionment method.
HMRC has the power to enquire into an apportionment method that it believes is not just and reasonable. 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. The airdropped cryptoasset, typically, has its own infrastructure which may include a smart contract, blockchain or other form of DLT that operates independently of the infrastructure for an existing cryptoasset.
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 section 43 Taxation of Capital Gains Act does not apply. If an individual disposes of cryptoassets for less than their allowable costs, they will have a loss.
A negligible value claim treats the cryptoassets as being disposed of and re-acquired at an amount stated in the claim. As cryptoassets are pooled, the negligible value claim needs to be made in respect of the whole pool, not the individual tokens. The disposal produces a loss that needs to be reported to HMRC.
Negligible value claims can be made to HMRC at the same time as reporting the loss. If an individual misplaces their private key for example throwing away the piece of paper it is printed on , they will not be able to access the cryptoasset. The private key still exists as part of the cryptography, albeit it is not known to the owner any more. Similarly the cryptoassets will still exist in the distributed ledger. This means that misplacing the key does not count as a disposal for Capital Gains Tax purposes.
If it can be shown there is no prospect of recovering the private key or accessing the cryptoassets held in the corresponding wallet, a negligible value claim could be made.