HM Revenue & Customs Publishes Guidance on UK Taxation of Cryptoassets

HM Revenue & Customs has released guidance interpreting the UK tax code for individuals dealing in cryptoassets. While most transactions are assumed to be part of investment activities, certain transactions in cryptoassets are likely to be subject to UK income tax.

HM Revenue & Customs (HMRC) recently published guidance on how the United Kingdom’s (UK) tax code applies to UK tax-paying individuals dealing in cryptoassets. While the guidance focuses on “exchange tokens” such as Bitcoin and other cryptocurrencies, its general principles may apply to other cryptoassets as well.

HMRC does not consider cryptoassets to be money or currency, which is important when considering how to apply UK tax rules to cryptoasset transactions. For individuals, HMRC expects that most taxable transactions in cryptoassets will be in the nature of an investment activity, so any gains or profits realised will chargeable to capital gains tax rather than income tax. There are, however, a number of key exceptions.

• For individuals who mine cryptoassets, the GBP-equivalent value of the mined asset may be subject to income tax.
• Individuals who receive cryptoassets in exchange for goods and services may be subject to income tax on the GBP-equivalent value of the cryptoassets received.
• Individuals who are remunerated for their UK employment in the form of cryptoassets will be subject to income tax (and possibly national insurance) on the GBP-equivalent value of the cryptoassets they receive.

Employers intending to pay their employees in cryptoassets will need to consider whether they need to account for income tax and national insurance under the UK’s “pay as you earn” payroll withholding system. This is likely to be the case if remuneration is in the form of cryptocurrencies that can be readily converted to conventional cash. Employers making such payments will need to remember that HMRC does not (yet) accept payment in the form of cryptoassets, and thus should make arrangements to ensure they recover cash directly or indirectly from employees to make good the income tax and national insurance liabilities (e.g., by withholding tokens and selling them on behalf of affected employees).

The guidance also describes how HMRC will approach certain specific events; for example, how HMRC views events such as “airdrops,” and how it will treat individuals who “lose their keys” and are unable to access their cryptoassets.

HMRC has stated that it will publish further guidance on the UK tax treatment of cryptoassets for businesses.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Kate Habershon
Neil McKnight