Personal Taxation – Investments in Cryptocurrencies


Written by Tony De Nazareth, CEO and Director of Crowd for Angels who is a Fellow of the ICAEW.

The HMRC recently published a new policy paper termed “Cryptoassets for Individuals” This is in line with our paper on Personal Taxation – Investments in Cryptocurrencies reproduced below:

The guidance identifies three possible treatments for profits on cryptocurrencies:

1. Trading profits which will be subject to income tax;
2. Highly speculative transactions which are treated as gambling and therefore not subject to income tax;
3. Capital gains which will be subject to capital gains tax.

Case law has established the general principles underlying these treatments, which would also apply to profits on cryptocurrencies.

It is assumed that you will own the cryptocurrency personally: the tax treatment of profits in a company is likely to be different. It is also assumed that you own the cryptocurrency directly and not via a wrapper such as an ETF or fund.

Trading

Case law has established a number of ‘badges of trade’ which will be considered when determining if an activity constitutes a trade for tax purposes. These include profit-seeking motive, frequency and number of similar transactions, connection with an existing trade,
financing arrangements, length of ownership and reason for the acquisition/sale. A large volume of cryptocurrency transactions, where positions are taken for a short time only, may reflect a number of these badges.

However, case law (in particular Salt v Chamberlain [1979] 53 TC 143 and more recently A Ali v HMRC [2016] UKFTT 8 (TC)) has also established that profits arising to individuals from share dealing are not trading profits, even if the badges of trade are present. A similar principle can be applied to cryptocurrency dealing, and it is therefore very unlikely that profits would be treated as trading profits.

Gambling

The HMRC’s Business Income Manual (at BIM 22015) states that ‘the basic position is that betting and gambling, as such, do not constitute trading’ (referring to the case of Graham v Green [1925] 9 TC 309).

The definition of a ‘bet’ was considered in Carlill v Carbolic Smoke Ball Co. [1892] 2 QB 484 and has been followed in later cases, and is reflected in the HMRC guidance (at BIM22016):
‘It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known.’

Cryptocurrency markets have become more established and the market fluctuations (arguably) less irregular. Although some commentators still say that cryptocurrency investments are a ‘gamble’, many investors have sophisticated investment and trading strategies which do not rely solely on chance.

It is therefore difficult to see how the profits on mainstream cryptocurrencies could be seen as gambling profits. There may conceivably be some cryptocurrencies in which the markets are random, and therefore the profits could be treated as gambling rather than trading profits.
The fact that the cryptocurrency profits are gambling – and therefore not treated as trading profits – does not preclude them from being subject to capital gains tax. Gambling transactions are typically only a cash wager between two parties, and therefore no chargeable assets are involved.

Capital Gain

HMRC’s guidance pre-supposes that cryptocurrencies can be chargeable assets for CGT purposes. This is probably correct. They are intangible assets which carry certain rights, and can be bought and sold. The profits you make on cryptocurrency investments are therefore
likely to be subject to CGT.

Remittance basis

If you have only recently come to the UK, you are likely to be treated as a resident but not domiciled in the UK. This means that you can claim the remittance basis of taxation, under which income and gains which have a source outside the UK are only taxed if they are remitted
to the UK.

Assuming that the cryptocurrency is an intangible asset for CGT purposes, TCGA 1992 s 275A provides that gains will be treated as arising in the UK if the asset is subject to UK law. Most cryptocurrencies are not governed by UK law and therefore gains should not be treated as UK
gains. This means that the profits on the sale of the cryptocurrency should not be taxed if the proceeds are kept outside the UK.

The position will be different if the profits are treated as trading profits. ITTOIA 2005 s 7(5) provides that where a trade is undertaken in the UK, the profits will be treated as arising in the UK. If you are investing in cryptocurrencies whilst in the UK, the trade would be undertaken in the UK and the profits would have a UK source.

Any profits you made before you came to the UK should be held in separate bank accounts as ‘clean capital’ so they can be brought to the UK without any tax arising.

To check out HMRC’s policy paper  CLICK HERE. 

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