On 30th March 2021, Her Majesty’s Revenue and Customs (HMRC) updated its guidance on the taxation of cryptoassets for individuals and businesses in the form of a new HMRC Manual, featuring some additional clarifications about income from staking in proof-of-stake networks.
What are Cryptoassets?
Cryptoassets, tokens or cryptocurrency are cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically. In simpler terms, cryptocurrency is a type of electronic cash that is generally held as investments due to their ability to rise and fall in value.
Despite the name, cryptocurrency isn’t very monkey-like just yet and very few shops/businesses accept it as a form of payment. This is why HMRC refers to it as ‘cryptoassets’ as opposed to cryptocurrency.
There are a number of different types of cryptoassets that work in different ways. The main types include:
Exchange tokens are intended to be used as a method of payment and are becoming a popular way of investing due to the potential they hold to rise in value. You may have heard of ‘bitcoin’ which is the most well-known exchange token.
Utility tokens grant the holder access to certain goods or services on a platform. Businesses or groups usually issue the tokens and commit to accepting them as payment for certain goods or services. Additionally, utility tokens can be traded on exchanges or in peer-to-peer transactions in the same way as exchange tokens.
Security tokens grant the holder with particular rights or interests in a business e.g. ownership, repayment of a specific sum of money or entitlement to a share in future profits.
Stablecoins minimise volatility as they are considered to have a stable value such as fiat currency (government backed) or precious metals like gold.
How HMRC Treats Cryptoassets Under New Guidance
The way in which HMRC treats cryptoassets depends on the nature of use of the token and not the token type. HMRC doesn’t consider cryptoassets to be currency or money, reflecting the same position that was previously set out in the old papers, however, most individual investors will be subject to individual Capital Gains Tax on gains and losses on cryptoassets.
Previously, it was assumed that staking fell under the same umbrella as mining (the creation of bitcoins) and so the same guidance was applied. In fact, the guidance provided in the new guide is nearly identical in its wording to that on mining, however, the separation of the two opens up opportunities for differing rules in the future.
HMRC clarified that any income derived from staking is taxable and any rewards derived from staking must be accounted for as miscellaneous income on a tax return from now on.
The new guidance also states that the taxation of staking activity by businesses depends on whether the activity “amounts to a taxable trade” which is based on numerous factors such as the degree of activity, nature of the organisation, risk involved and commerciality of the activity. If staking activity doesn’t amount to trade, the pound sterling value of the cryptoassets awarded will be taxable as miscellaneous income.
Transferring Coins Between Ledgers
HMRC have also clarified that coins transferred between ledges would remain at the original cost basis and be carried forward for any future disposal.
Investing vs Gambling
Despite some views that cryptocurrency is more like gambling than investing, HMRC have confirmed that the process is in fact viewed as investing as opposed to gambling. This hardly comes as a surprise as in the UK, gambling proceeds are exempt from Capital Gains Tax and income tax which would mean the Treasury would lose out if it was to be classified as gambling.
Capital Gains vs Income Tax
The Capital Gains Tax vs income tax debate has also been cleared up in the new guidelines. At the moment, cryptoassets are taxed under Capital Gains Tax similar to stocks and shares. There are some exceptions where individuals may be classed as traders and would therefore have income tax applied as any gain would be considered as a personal income.
Despite this loophole, HMRC is of the opinion that people are highly unlikely to becomes cryptoasset traders for the sole purpose of taxes, so the switch would only apply in a very small number of cases.
By producing an official manual, HMRC hopes to demonstrate their commitment to providing clarity to customers, aiming to help individuals and businesses to understand the tax consequences of each type of cryptoasset transaction.
A HMRC spokesperson said the guidance: “builds on the previously published policy papers and will provide a more flexible approach to updating customers in this fast-moving sector.”
The guide is likely to continue to be updated as the sector is so fast paced and lacks any regulation.