UK: Overview of the taxation of cryptoassets

According to the HM Revenue & Customs (HMRC) cryptoassets manual, individuals generally will be treated as holding “cryptoassets” as a personal investment and will be subject to capital gains tax on disposal.

Calculating gains may not always be straightforward. Many cryptoassets are traded on exchanges that do not use the pound sterling and it is also common in the crypto world to directly exchange one cryptoasset for another. Because of the volatility in the crypto market, actually valuing cryptoassets on disposal can be complicated. 

HMRC views different types of cryptoassets as separate assets for capital gains purposes. For example, the swapping of bitcoin for a Polkadot token would trigger a disposal for capital gains tax purposes even if no actual currency has been received. In this situation, the individual investors would realise either a taxable gain (or loss) and may need to make further disposals of cryptoassets into actual currency to meet their tax obligations.   

Some individuals may also be involved in mining and validating transactions, as well as staking and yield farming. In doing so, they may be rewarded either through the receipt of fees and/or further cryptoassets. Typically, such rewards would be subject to income tax, but whether that amount is treated as trading income or not would depend on the particular facts and applying the case law principles of trading versus investment to those facts.

The very nature of cryptoassets is that they are decentralised and digital in nature and do not have a physical location or exist anywhere. However, determining the location or “situs” of assets is important for tax purposes—and particularly for UK resident or non-UK domiciles because it can change the tax consequences dramatically.

In guidance, HMRC stated the view on the situs of exchange tokens, including the likes of bitcoin. HMRC’s view is that an exchange token is located wherever the beneficial owner is a resident (provided it is not a digital representation of another underlying asset). Therefore, if the bitcoin owner is resident in the UK, then the cryptoasset may be located in the UK.

This situs of exchange tokens is only based on HMRC guidance. There has not been any legislation. It also brings to question whether other types of tokens (other than exchange tokens) are to be treated the same and whether the mechanism by which an individual accesses their cryptoassets always amounts to beneficial ownership.

Nonetheless, if UK resident, non-UK domiciled individuals personally purchase cryptoassets using that untaxed foreign income or gains, then they may have remitted those funds into the UK and triggered a tax liability at the point of purchase. Further, if those individuals go on to dispose of those cryptoassets and realise a gain, that gain may be taxable in the UK—without the benefit of the remittance basis of taxation. As individuals increasingly earn income on their cryptoassets, that income may be considered UK-source and taxable on an arising basis as well.

Read a June 2021 report prepared by the KPMG member firm in the UK