On Nov. 1st, 2019 the Tax Authority of the United Kingdom, Her Majesty’s Revenue and Customs (HMRC), published guidance declaring all businesses engaged with cryptocurrencies must keep sterling pound denominated records of all trades, regardless of whether the trade is settled or involves pounds. HMRC also clarified that generally all trading profits must be calculated in UK GAAP or IAS, some exceptions apply.
Highlights of the published guidance on taxation of cryptocurrency for businesses include:
- The buying and selling of exchange listed tokens may be considered a trade or business depending on (1) the degree and frequency of activity, (2) level or organization, and (3) intention.
- The calculation of any corporation tax due should be calculated as a company would with any other type of asset. If it is not considered a trading activity, selling cryptocurrency may be treated as a disposal of a capital asset and therefore a chargeable gain.
- Companies may treat exchange tokens as intangible assets if they are both an intangible asset for accounting purposes and an intangible fixed asset. In addition, there are specific exclusions for tokens that represent financial assets and other financial instruments.
- Airdrops should be held separately and the basis in any airdropped crypto asset is not derived from any other asset (i.e., they do not fall under Section 43 of the Taxation of chargeable Gains Act 1992).
- New definitions for soft forks, hard forks and situations that result in new cryptocurrencies.
- Clarification that mining activity is generally outside the scope of value-added tax (VAT). Additionally, no VAT will be due on the exchange of tokens itself when used in to purchase goods and/or services.
The new updated guidance provides clarity over many aspects of digital asset tax treatment in the UK. However, more complex tax situations and cross-border transactions will still be difficult to address. Businesses and individuals with digital asset activity in the UK should consult with their tax advisor in order to understand how this new guidance may impact their specific situation.
