A comprehensive explanation on taxation for private cryptocurrency holders has been released by the United Kingdom’s tax agency this Wednesday.
The publication focuses on private investors, and does not explicitly consider the tax treatment of cryptoassets held by businesses or for business purposes. The agency that made the announcement, Her Majesty’s Revenue and Customs (HMRC), will publish further information regarding cryptoassets held by businesses on a later date.
The paper follows on a previous report by the Cryptoasset Taskforce (CATF), which states that cryptoassets are not considered to be a currency or money, and that they are separated into 3 broad categories: exchange tokens, security tokens, and utility tokens. HMRC noted that the tax treatment does not depend on the definition of the token, but rather its nature and use, and further stated that:
This paper considers the taxation of exchange tokens (like bitcoins) and does not specifically consider utility or security tokens. For utility and security tokens this guidance provides our starting principles but a different tax treatment may need to be adopted.
According to the document, taxation will depend on the type of transactions an individual is involved in. For example, in the case you received cryptoassets from mining, transaction confirmation, airdrops, or from your employer as a form of non-cash payment, you will be liable to pay Income Tax and National Insurance contributions.
It further outlines how different events could affect taxation, such as loss or theft of cryptocurrencies and blockchain forks. For example, a lost private key does not count as a disposal for Capital Gains Tax purposes, and if the individual can prove there is no prospect of recovering the key, a negligible value claim could be made.
HMRC also advises individuals to keep separate records for each transaction, as exchanges keep the information for a limited time and it may no longer be in existence when an individual completes a tax return. The records need to include: type of cryptoasset, date of the transaction, were they bought or sold, number of units, value of the transaction, cumulative total of the investment units held, and a bank statements and wallet addresses.