The number of people holding cryptoassets has exploded in recent years. By 2022, it has been estimated around 5 million people in the UK hold, or have held, cryptoassets. That’s almost 1 in 10 of the adult population.

However, with this evolution comes the need to understand the tax obligations associated with cryptoassets in the United Kingdom.

In this article, we provide a breakdown of what cryptoassets are and tax implications you might have using them.

What are cryptoassets?

Cryptoassets are in simplest terms a digital representation of value. In the same way a pound coin in your pocket represents £1 of value that you own through physically possessing it. Cryptoassets represent value, with your ownership proven using computer code.

Cryptocurrency

The most common cryptoassets you are likely to encounter is cryptocurrency. These are digital currencies that serve some of the key purposes of traditional currency. However, unlike traditional currencies, digital currency transactions are verified and recorded on a decentralised ledger rather than a centralised authority.

In a practical sense this means that a cryptocurrency transaction is verified and recorded on a network based across a large number of computers and secured by cryptography rather than a central institution, such as a bank or government, that you would see when making a transaction with a traditional currency.

This decentralised construction is also what a makes digital currencies different to online transactions with traditional currency – such as an online bank transfer. Even though, in both instances, the transaction is electronic and does not have a physical form an online bank transfer will still be verified by a central institution.

The most well-known example of a cryptocurrency is Bitcoin, which was launched in 2008. Bitcoin defines itself as:

Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.

 Bitcoin.org

Other crypto assets

In recent years we have also seen an expansion of other asset classes in the crypto asset category.

Non-Fungible Tokens (NFTs) emerged to represent unique digital items such as art. These differ from crypto currency in that each NFT is unique. A Bitcoin is fungible – in that if you trade one Bitcoin for another Bitcoin, you’ll have the same thing. On the other hand, non-fungible items are unique. So, if you traded your NFT for another NFT, you would have something completely different. It would be like trading two artworks, even if the value of the art is the same the art itself would be different.

Decentralised Finance (DeFi) is an emerging financial technology based on providing traditional financial services, but using secure decentralised ledgers similar to those used by cryptocurrencies.

Advantages and disadvantages of cryptoassets

Advantages of cryptoassets

Some of the advantages of cryptoassets include:

• Decentralization: Cryptoassets operate on decentralised networks, this reduces reliance on central authorities such as banks or governments.
• Security: Cryptography techniques and use of blockchain technology can make transactions using cryptoassets more secure. The key to blockchain’s security is that any changes made to the database are immediately sent to all users to create a secure, established record. With copies of the data in all users’ hands, the overall database remains safe even if some individual users cryptoassets are hacked.
• Accessibility: While less of an advantage in the UK, due to the Faster Payment Scheme offering almost instant online bank transfers. In developing countries, and even some major economies (such as the US) cryptoassets allow for faster transfers of capital. For global transactions cryptoassets have the advantage of being borderless and so can be faster and cheaper than international transfers.
• Privacy: Transactions involving certain cryptoassets can provide a greater level of anonymity. In the case of Bitcoin, the only link to a Bitcoin address is the encryption key.

Disadvantages of cryptoassets

Some of the disadvantages of cryptoassets include:

• Value Volatility: Cryptoassets markets can be highly volatile. The decentralised nature means they are not secured or guaranteed by a central institution, such as a bank or government. This means prices can rapidly fluctuate, which can lead to substantial gains or losses.
• Lack of Regulation: The regulatory framework for cryptoassets is still evolving, leading to uncertainty and potential risks for investors and users.
• Security Risks: While the underlying technology is hard to hack, cryptoassets can be more vulnerable to scams and theft, especially where there is poor personal security.
• Illegal Activities: While there is no definitive figure for the proportion of cryptoasset transactions that are illicit, cryptoassets have been estimated to be involved in hundreds of millions of pounds of money laundering and implicated in terrorist investigations.
• Limited Acceptance: Despite growing acceptance, cryptoassets are not universally recognised as a legitimate form of payment.

Cryptoassets and tax in the UK

In the view of the HMRC, the use of cryptoassets is liable for tax. Therefore, in the UK you do have to pay tax on cryptoassets. The type of tax you have obligations for will depend on your use of cryptoassets.

What tax should I pay when selling cryptoassets:

When you sell or dispose of cryptoassets, such as exchanging them for traditional currency or other cryptocurrencies, you may be liable for Capital Gains Tax. Capital Gains Tax applies to the profit you make when selling cryptoassets that exceed your tax-free allowance. The annual tax-free allowance in the UK for 2023/2024 is £6000.

Calculating Capital Gains Tax on cryptoasset sales can be complex. You’ll need to work out the gains on each cryptoasset transaction you make. The way you work this out can vary if you choose to sell your assets within 30 days of purchase. You can also deduct certain allowable costs, including a proportion of the pooled cost of your tokens when working out a gain. It is advisable to maintain detailed records of each cryptoasset transaction, including the acquisition cost, date of purchase, and any associated fees.

What tax should I pay receiving cryptoassets?

You might receive tokens either from mining or as payment from an employer.

If you receive cryptoassets from mining and are not trading, the tokens will be treated as other taxable income. Unless you have received cryptoassets worth less than £1000 or less than £2500 from other untaxed income you’ll need to complete a Self-Assessment tax return.

If you receive cryptoassets from an employer, they are treated as taxable income by the UK government. If your income is a readily convertible asset your employer will pay Income tax on your behalf if you are either paid in tokens only, or they cannot deduct the full amount from your other wages. If they pay tax on your behalf, you should reimburse them within 90 days of the end of the year.

You should keep records on the types and amounts of tokens, when you received them, their value in GBP and the date you disposed of them.

Can I pay employees in cryptoassets?

Yes, you can pay employees in cryptoassets. Cryptoassets in the eyes of the HMRC is the same as paying employees in shares, commodities, or other non-cash pay. You’ll have to calculate and deduct PAYE tax and National Insurance contributions on the payment.

Do I pay Inheritance tax on cryptoassets?

Yes, you do need to pay inheritance tax on cryptoassets. Cryptoassets are considered as property for the purposes of inheritance tax (IHT). As a result, they can be liable for inheritance tax at 40%. However, the location of assets may need to be determined for non-UK domiciled taxpayers.

How to manage cryptoassets and tax

Due to the complexity around cryptoassets and tax it is strongly recommended to keep accurate and thorough records. Specialist cryptoasset accountants can also assist in tracking and calculating your tax obligations to ensure you stay compliant.

At RA Accountants we are experts in helping clients manage their cryptoassets tax liabilities. We offer a complimentary, initial online consultation to discuss your personal circumstances and to see how we can help. Get in touch to book your appointment today.

These articles are for guidance only and professional advice should be obtained before acting on any information contained in them.

No responsibility can be accepted for loss occasioned howsoever to any person as a result of action taken or refrained from as a result of reading.