Cryptoassets for businesses – tax implications
The tax implications of buying, using and selling cryptoassets from the point of view of a person (an individual or a company) carrying on, or intending to carry on a business.
In the absence of tax legislation relating specifically to cryptoassets, we must apply general principles with help from HMRC’s Cryptoassets Manual.
One way to approach this is to consider the questions below.
• how was the cryptoasset acquired?
• if it was bought, was it bought to sell at a profit or to use in an existing trade?
• if it was bought to sell at a profit, do the activities amount to a trade?
• if it was earned, was it through activities such as mining, etc, or through other trade activities?
• if it was earned through mining, do the activities amount to a trade?
We’ll look at the tax implications of the different scenarios in the following paragraphs, but before we do please note the following general points:
• HMRC does not regard buying and selling cryptoassets to be gambling;
• HMRC does not regard cryptoassets as being money or currency. Further, HMRC’s position is that cryptoassets do not create, and cannot be treated as creating a loan relationship for the purposes of CTA 2009, Pt. 5 and 6;
• in general, the cryptoasset will be accounted for as stock/inventory (in the case of a person carrying on a trade of dealing in cryptoassets) or as an intangible asset; and
• it is not the case that a cryptoasset which is accounted for as an intangible asset automatically falls within the intangible fixed assets (IFA) rules applying for corporation tax purposes (CTA 2009, Pt. 8). A number of conditions must be met for the IFA rules to apply, including that the cryptoasset is acquired or created by the company for use on a continuing basis in the course of the company’s activities. In the circumstances envisaged in this article, it is unlikely that the cryptoasset will fall within the IFA rules.
|Acquired||Why/how||Trade?||Summary of tax treatment|
|Bought||Sell for profit||Yes||Included in trade income (new trade)|
|Bought||Sell for profit||No||Chargeable gain/loss on disposal|
|Bought||Use in business||n/a||Included in trade income (existing trade)|
|Bought||Mining||Yes||Included in trade income (new trade)|
|Bought||Mining||No||Miscellaneous income on acquisition|
|Bought||Other||n/a||Included in trade income (existing trade)|
|Gift||n/a||n/a||None on acquisition; gain/loss on disposal|
Bought to sell at a profit
Where the business has acquired the cryptoasset in order to sell it at a profit, we must determine whether the business is carrying on a trade of dealing in cryptoassets. To do this, we must apply the normal rules, including the badges of trade.
HMRC’s view is that ‘only in exceptional circumstances’ would activities of this nature amount to a trade. This is because HMRC views a trade in cryptoassets as being akin to a trade in shares and securities, where the bar for qualifying as trading is set quite high. Drawing on HMRC’s guidance, you may wish to consider if any of the statements below apply and if so, whether, on balance, they are sufficient to suggest that a trade is being carried on.
Possible indicators of trading
Prior to beginning the activity:
• the person had experience of dealing in cryptoassets. Did the person have any skills or knowledge which would suggest they could make a profit?
• the person prepared a realistic business plan showing that a profit would be made.
Once the activity had begun:
• the activity was carried on in a commercial manner. For example, detailed research was undertaken before a transaction was carried out.
• assets were bought and sold frequently. A person engaged in a trade is likely to be buying and selling assets much more frequently than an investor.
• the assets were held for a relatively short time. Holding an asset for a longer period of time may suggest an investment motive.
• the person had sufficient time to devote to the activity. It may be that the person had significant other commitments (eg, full-time employment) with the result that they did not have the time to carry on the activity in a business-like manner.
Where a trade of dealing in cryptoassets is being carried on, the charge to tax on trading income will apply in the normal way. The cryptoassets will be accounted for as stock/inventory.
Where the cryptoasset is held for investment purposes, the position is likely to be that the disposal of the cryptoasset will give rise to a chargeable gain or loss. The position for individuals is considered in our earlier article and much of this applies to companies too. There is an important difference in the matching rules: for companies, disposals are matched with acquisitions on the same day, acquisitions in the previous nine days and then the s. 104 pool.
Bought to use in the business
The person may have bought the crypoasset in order to use it in an existing trade; for example, to pay for goods or services. In this case, the cryptoasset is taken into account in calculating the person’s trade income in the normal way.
Earned through mining
The person may have been allocated cryptoassets having solved a cryptographic puzzle using a computer or computers (mining) or by contributing to the proof of stake work that validates a block on the blockchain (staking).
Whether or not these activities amount to a trade depends on general principles, including the badges of trade. For example, where a person, who has a realistic intention of making a profit, goes about the activities in a commercial and organised way, it is likely that they are carrying on a trade.
Example provided by HMRC
‘…using a home computer while it has spare capacity to mine tokens would not normally amount to a trade. However, purchasing a bank of dedicated computers to mine tokens for an expected net profit (taking into account the cost of equipment and electricity) would probably constitute trading activity.’
Where a trade is being carried on, the value of the cryptoasset will be brought into account as trading income.
In any other case, the value of the cryptoasset (net of allowable expenses) is chargeable to tax as miscellaneous income (CTA 2010, Pt. 10 for companies; ITTOIA 2005, Pt. 5 for individuals). The person may have a capital gain or allowable loss when they come to sell the asset.
Earned through other activities
A person carrying on a trade may receive payment for goods or services in cryptoassets. In this case, the value of the cryptoassets is taken into account in calculating the person’s trade income.
Other tax issues may arise depending on how the crytoassets are then used; for example, a chargeable gain or allowable loss may arise on the sale of the cryptoasset.
Received as a gift
An airdrop – being where a person receives a cryptoasset, perhaps as part of a marketing campaign – may fall within this category if the person has not earned the cryptoasset and is not engaged in a trade of dealing in cryptoassets or carrying on mining.
In this case, there may not be a charge to income tax or corporation tax on receipt; however, the person may have a chargeable gain should they sell the cryptoasset.
If you haven’t already come into contact with cryptoassets, the likelihood is that you will soon: over two million people hold cryptoassets but they are a risky investment, warns the Financial Conduct Authority (FCA), although it is becoming more common. HMRC’s manual is a good start but it does leave some questions unanswered; no doubt we can expect to see some changes in this area in the years to come.