Tax considerations of holding cryptoassets for UK companies

What are cryptoassets?

Cryptoassets (also referred to as Cryptocurrencies) are a new asset class that has been developed over the last decade. They have changed dramatically throughout this time, and so has the government regulation surrounding them.

HMRC defines cryptoassets as “cryptographically secured digital representations of value or contractual rights” that have the potential to be transferred, stored and traded electronically. HMRC do not consider cryptoassets such as Bitcoin and Ethereum to be currency or money.

The government’s Cryptoasset Taskforce (CATF) identifies three types of cryptoassets: exchange tokens, utility tokens and security tokens:

Exchange tokens – these are intended to be used as a method of payment and include cryptocurrencies like Bitcoin and Litecoin. They do not provide any rights or access to goods or services.

Utility tokens – these provide the holder with access to particular goods or services on a platform usually using Distributed Ledger Technology (DLT).

Security tokens – these may provide the holder with particular interests in a business, including debt due by the business or a share of profits in the business.

Each type of token’s treatment for taxation purposes is based on the “nature and use of the token and not the definition of the token”.

Which taxes apply to companies (UK residents)?

Trader or investor?

The company needs to consider if it is engaged in financial trading in cryptoassets, or is an investor.

As with the tax analysis of other types of business, the question of whether a trade is being carried on is a key factor in determining the correct tax treatment.

Whether the buying and selling of exchange tokens amounts to a trade depends on a range of factors including:

• frequency
• level of organisation
• intention

If a company’s activities do amount to a trade, the sales and purchases of cryptoassets will form part of the calculation of the company’s trading profit, rather than chargeable gains.

Only in exceptional circumstances would HMRC expect businesses to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. Whether a business is engaged in a financial trade through the activity of buying and selling tokens will ultimately be a question of fact. It’s often the case that individuals and companies entering into transactions consisting of buying and selling tokens will describe them as ‘trades’. However, the use of the term ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes.

Consideration of whether or not a company is engaged in financial trading is a very complex area. It is not as simple as working through the ‘Badges of Trade’ as these have been demonstrated to have limitations in the context of financial trading. The relevant considerations have been detailed in the Appendix to the Recap UK Tax Guide for Individuals which explores the approach HMRC would take to gather the facts of the case and summarises relevant case law on the topic. These principles applied in examining whether or not an individual is trading are the same as need to be examined to consider if a company is trading.

If the company is investing in cryptoassets

Where the company is investing in cryptoassets:

• receipts of crypto income are subject to corporation tax (currently at a rate of 19%) and treated as Miscellaneous Income.
• disposals of cryptoassets are subject to the chargeable gains regime in order to calculate a chargeable gain or loss on each disposal. These rules are similar to the CGT investor rules for individuals however, the ‘matching rules’ determining the acquisition cost to be deducted from disposal proceeds are different for companies. The net chargeable gain is subject to corporation tax.
• disposals of cryptoassets (except NFTs) for companies are matched against acquisitions of the same type of token in priority order as below:

1. 1. Acquisitions on the same day
   2. Acquisitions in the prior 9 days, on a first in first out basis
   3. S104 pool

If the company is trading in cryptoassets

Companies who are classified as financial trading in cryptoassets are required to pay corporation tax on the trading profits arising their activity in cryptoassets. This could be income from staking for example, or profits on disposals of cryptoassets.

Sources of further information:

Recap UK Tax Guide for Individuals

HMRC Cryptoassets Manual

If you need any support with your cryptoassets or would like more information please get in touch with one of our crypto specialists.