The global crypto population has more than doubled from 100m to 200m within a four-month period in the first half of 2021. According to a Finder survey, a fifth (19%) of the UK population have previously bought cryptocurrency; the equivalent of 9.8 million people and a huge increase from 2018 when just 3% of the UK population held or invested in crypto.
One of the other key changes in the rise of crypto currencies during 2021 is the increased investment from institutional investors such as Blackrock, Morgan Stanley and BNY Mellon in this asset class. Tesla’s Elon Musk has been particularly vocal in 2021 on Bitcoin’s place in the world where he firstly stated that Tesla held Bitcoin and would accept Bitcoin as payment, before citing environmental concerns in relation to the energy consumption required to mine and hold these assets.
NFTs (Non-Fungible Tokens) can be anything digital (such as drawings or music) but there has been increased excitement and visibility during 2021 of investors buying and selling digital art. NFTs are mostly part of the Ethereum blockchain as this blockchain allows these NFTs to store additional information which allows them to work differently to a standard Ethereum coin.
NFTs are unique instruments that cannot be changed on the blockchain, making it possible to guarantee the legitimacy of each digital asset, allowing for ownership of intangible assets, such as tweets, gifs and digital memes.
Recently some governments have sought out ways to get ‘onboard’ with El Salvador becoming the first country in the world to officially classify Bitcoin as legal currency. In the UK Rishi Sunak tweeted this week about Central Bank Digital Currencies (CBDCs) to mark the launch of the G7’s report on CDBCs and Digital Payments. This report aims to set policies of how digital currencies could be regulated by G7 countries alongside physical currency. These approaches are in stark contrast to the approach taken by China in May 2021 when the central government banned all crypto-mining and trading, citing environmental and financial concerns.
Crypto-assets and tax
The increased global activity has brought increased focus from global tax authorities as they attempt to regulate this increasingly prevalent form of investment.
In the UK, in most cases, an individual will be deemed to be carrying out an investment activity and will therefore be subject to Capital Gains Tax (CGT) when they buy, hold and subsequently sell crypto-assets. It is the disposal that results in a taxable event and determines whether any tax is to be paid. The amount of any gain is the difference between the value of the disposal proceeds and the value of the acquisition cost.
Each UK taxpayer has an annual Capital Gains tax free allowance (currently £12,300 for individuals) meaning that any gains up to this amount during a tax year will not incur any tax charge. Please note that this is across all investment classes not just investment gains on crypto-currencies or crypto-assets during a tax year. Any gains above this allowance will be taxed at 10% for a basic rate taxpayer and at 20% for higher and additional rate taxpayers.
Where a taxpayer is deemed to be carrying on a trade or carrying out a business of buying and selling of crypto-assets, they run the risks of being deemed to be a financial trader meaning that their profits would be taxed under the income tax regime. That said, in most circumstances an individual is unlikely to meet the test of being a trader and is likely to be taxed under the CGT regime.
Tax authorities now have well established processes to request and receive lists of crypto investors information from crypto exchanges such as Coinbase and Kraken. However the onus is on the taxpayer to keep their own records for each transaction in case of an HMRC enquiry or review.
Whilst HMRC’s guidance recognises that cryptocurrencies and the technologies behind them will continue to evolve. HMRC state that they will need to continue to evaluate their tax treatment and will issue further guidance as appropriate. Whilst reliance may generally be placed on HMRC guidance, an investor should take care to consider the nature of their investments on a case by case basis. In recent guidance notes HMRC state that they may not apply the suggested treatment where it considers tax avoidance to be an issue.
The next steps
For more information or to discuss any of the issues raised in this article, please contact Scott McCullough on firstname.lastname@example.org or your usual UHY adviser