The number of transactions in cryptocurrencies and digital tokens has been rapidly increasing over the last few years, both by individuals and companies.
This has led to HMRC producing further guidance on this area in a manual published in March 2021. Cryptocurrencies, exchange tokens and security tokens, as well as other similar tokens are collectively known as cryptoassets. Whilst the area around this is still developing some businesses have already started to consider the use of cryptoassets in several ways.
Therefore, it is important that companies consider any potential tax implications for both themselves and their employees before using these cryptoassets.
The general view from HMRC
HMRC does not consider cryptoassets to be currency or money, therefore they do not follow the same tax rules as normal currency or money. The taxation of the cryptoasset can depend on the individual circumstances surrounding a transaction, rather than the definition of the asset itself. There are a number of different tokens that can have differing consequences in tax.
Companies are required to pay UK corporation tax if they are UK resident or have a permanent establishment in the UK. The HMRC manual identifies specific areas in which gains/profits could be chargeable to corporation tax. These are trading income, loan relationships, intangibles and as chargeable gains or losses.
This is aligned very closely to the guidance for individuals, in that it would take exceptional circumstances for HMRC to view transactions in cryptoassets as being with enough frequency, sophistication and organisation to be classed as a ‘trade’. Especially when considering its relation to the main trade of the company, as any trading in cryptoassets would most likely be ancillary to the main trade.
Should the company only be transacting in cryptoassets, then HMRC are likely to class this as being a trade. It would be necessary to look at the case individually to decide whether a trade is being carried out, and to determine whether any income is taxable as trading profit or as a chargeable gain.
As with individuals, companies will need to pay special consideration to mining activities, as these are more likely to be classed as trading income, particularly if they have a server room full of computers mining 24/7. Any income gained through mining if classed as trading will be added to trading profits.
What constitutes a disposal?
Selling tokens, exchanging for a different type of token, using tokens to pay for services and giving away tokens to an individual/another company are all ways of disposing of an asset, and would be subject to a gains calculation for corporation tax.
There are certain allowable costs such as exchange fees that can be used to potentially reduce a gain. Certain mining costs cannot be allowable if they are not wholly and exclusively incurred to acquire tokens.
Gains made on the disposal of mined cryptoassets that are not trading assets will be classed as a chargeable gain for the business. The calculation of the gain will follow the same pooling rules which apply to shares and securities for companies. Each cryptoasset will be required to have its own pool for the calculations.
If assets are given away it is down to the business to work out the market value of what they have given away and this will be used to calculate any gain. The recipient will also have to use this as they are treated as acquiring the asset at the market value at the time of the gift.
Loan relationships and cryptoassets
Loan relationships arise when there is a money debt resulting from a transaction for the lending of money. As HMRC do not define cryptoassets as money, a cryptoasset cannot create a loan relationship.
Paying employees in cryptoassets
The developments in cryptoassets have led some businesses to want to pay their employees in cryptoassets. The value of the cryptoassets given to the employee is the amount to be taxed, as HMRC considers cryptoassets to be “money’s worth”.
An employer and employee will also have to make National Insurance contributions when the employee is paid in this way.
Value Added Tax (VAT) and cryptoassets
If goods or services are paid for using cryptoassets, then the VAT position does not change and remains the same as if it was paid with cash. The supply of tokens is considered by HMRC to be outside the scope of or exempt from VAT, but they state that the position may change as the result of future developments.
Cryptoasset tax planning
As with the sale of shares there are a number of ways that a business can minimise their tax burden by good planning.
- Offset losses – If capital losses have been made in the year, these can be offset against gains in the year which can be used to reduce the overall gain
- Negligible value claims – Where a cryptoasset has become worthless or defunct then a claim can be made, the effect of which allows losses to be relieved against gains
- Keeping a record of costs associated with purchases and sales –the costs to purchase the asset, exchange fees, transaction fees, etc. can all be allowable costs when working out a gain, so it is imperative detailed records are kept.
Reporting on cryptoassets
Cryptoasset transactions will need to be reported on a company’s corporation tax return. The returns will need to show the gains or losses made on any cryptoassets. If you are trading in cryptoassets then these need to be reflected in the trading profits. Corresponding entries for gains and income will also need to be reflected in a company’s accounts.
Shorts can assist with calculations if you plan to pay employees in cryptoassets, we can also review the transactions and consider if you are likely to be classed as carrying on a trade. We can also help with any accounting queries for cryptoassets and provide tax planning advice.