HMRC’s Changes to Cryptoasset Guidance

Yesterday HMRC published a ‘Cryptoassets Manual’ which replaces its existing cryptoasset policy papers; published in December 2018 for Individuals and November 2019 for Businesses.

So what’s changed?

Overall, not much has changed. The guidance itself has moved to the standard ‘HMRC internal manual’ format which acts as a common reference for HMRC staff and taxpayers. This format separates the content into multiple sections which is both easier to navigate and allows HMRC to update and expand their guidance more rapidly.

We expect HMRC to expand this guidance over the coming months. This is likely to address the growth and continuing innovation in the market, with topics centred around DeFi, loans and stablecoins.

How does the new update affect UK Individuals with crypto?

Derivatives

HMRC has added a new section on Derivatives. The new guidance is welcome, but we believe there are still grey areas, so we recommend you seek advice from a professional tax advisor, regarding which tax applies to your derivatives.

A derivative is a financial instrument where the performance is based on the movement of the price of the underlying asset. Under a derivative, the holder does not hold the underlying asset. Some businesses offer the ability for individuals to gain exposure to the movements in the cryptoasset market by using a derivative. It is important to note that derivatives settled in cryptoassets will also have an impact on your capital gains tax position, in addition to closing the position.

Where a derivative held by an Individual is not for the purposes of a trade or property business; HMRC states two possibilities for taxation remain: gains/losses may be treated as miscellaneous income, or they may be subject to capital gains.

• Capital gains: Where the derivative held by an Individual is a financial future, a commodity future or an option; HMRC confirms at CFM50070 that gains or losses are subject to the capital gains regime. However, HMRC point to further full guidance at CG55400 onwards; so this should also be considered when reaching your own decision on which tax treatment applies to your derivatives.
• Miscellaneous income: Where the derivative held by an Individual is not a financial future (for example, an interest rate or currency swap contract), HMRC state at CFM50070 that profits and losses are likely to be taxable as miscellaneous income. HMRC’s views on this point were contained in Tax Bulletin article (TB66, September 2003), which is reproduced at CFM50080.
• Non-taxable derivatives – neither miscellaneous income or capital gains?: Although HMRC states derivatives are either taxed as miscellaneous income or capital gains; in the same guidance at CFM50070, they allude to some derivatives being non-taxable. HMRC confirms that where a derivative is held by an Individual, it is possible for profits to be non-taxable, and losses not relievable; following principles laid down by case law. HMRC state the most common example is spread bets entered into by an individual purely as a wager – see BIM22020. However, they say this will not apply if the spread bet is used for a commercial purpose, for example as a hedge. HMRC give no other examples of non-taxable derivatives, so this remains a grey area and we recommend you seek professional tax advice if you are considering relying on this point.

Staking rewards

HMRC has clarified that, outside of ‘professional/commercial’ operation, the receipt of staking rewards should be reported as miscellaneous income (rather than interest), with the rewards subject to capital gains tax when disposed of.

Allowable Costs

Splitting transaction fees: The manual states that exchange fees for crypto to crypto trades equally apply to the resulting disposal and acquisition. Given that the fee can only be ‘used’ in the CGT computation once, it should be apportioned on a ‘just and reasonable’ basis between the disposal and acquisition, with an HMRC suggested split of 50/50. Other splits are not ruled out, but will be dealt with ‘on a case by case basis’ and may therefore require justification if they were ever queried. Exchange deposit and withdrawal fees are not deductible: HMRC has confirmed these fees are not deductible in the CGT calculation; which is in accordance with our longstanding view.

Pooling

Pooling applies to shares and securities and also ‘any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired’ – also known as fungible assets. Most cryptoassets are fungible and subject to the pooling rules.

HMRC confirm that Non-Fungible Tokens (NFTs) are separately identifiable and so are not pooled in the same way that most cryptoassets are.

The new HMRC guidance gives new examples of section 104 pooling, where the tokens are fungible. These have been added to clarify how acquisitions and disposals should consider and follow the same-day and 30-day rules. Example 7 is a crypto-to-crypto scenario, which uses different valuations for each side of the trades. This is contrary to the common assumption that both sides of a trade on an exchange are of equivalent value; since it is a ‘bargain at arm’s length’ between unconnected parties. We will be investigating this further and discussing the specifics with HMRC.

Cryptoasset gains to disclose to HMRC?

Although HMRC made their position on the taxation of cryptoassets clear in their December 2018 guidance, they believe there are still a great number of taxpayers who have not yet declared their income and gains from crypto to HMRC. If you have been involved with cryptoassets and would like some advice or assistance with a voluntary disclosure, please get in touch. Penalties for undeclared tax can be reduced to Nil in certain circumstances when a voluntary disclosure is made. If HMRC investigates you before you contact them, there is a minimum penalty of 15% of the undeclared tax.

We partner with Recap.io, who have developed a software application to apply the UK tax rules to your crypto activity and give you an Income and CGT Report to assist with the completion of your tax return. We have worked closely with them regarding the tax aspects of the app and this is the only software product we endorse for our clients’ UK cryptotaxation. For the basics of crypto asset taxation, including what are taxable events, please refer to the Recap UK Tax Guide for Individuals at https://recap.io/guides/uk-tax-full.

If you would like any advice or assistance regarding cryptoassets; please contact our Crypto taxation Specialist, Louise Lane at louise.lane@wrightvigar.co.uk.