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HMRC’s new guidance on cryptoassets and business taxes

Adrian Mooy - Monday, March 09, 2020
Until now, HMRC’s guidance on the tax consequences of using or trading in cryptoassets, such as digital currencies like Bitcoin, was mainly aimed at individuals. It’s now published new guidance for businesses.


Types of cryptoassets


In November 2019 HMRC issued new guidance on cryptoassets. It prefers this name to cryptocurrencies because, in common with most governments and banks, it doesn’t recognise Bitcoin etc. as currency or money. Instead it views them as types of token: exchange tokens, utility tokens or security tokens. The differences between these three is subtle, but for now HMRC has limited its latest guidance to exchange tokens. HMRC says that an exchange token is ”intended to be used as a method of payment and encompasses cryptocurrencies like bitcoin” for which “there is no person, group or asset underpinning these, instead the value exists based on its use as a means of exchange or investment.”


Tax and exchange tokens


The tax treatment of crypto exchange tokens depends on how you use them, and whether your business operates through a company or is unincorporated.


Paying with cryptoassets


Where cryptoassets are used as a means of payment, the value on the transaction must be recorded in your books in a recognised currency. For example, for transactions in the UK the value must be recorded as sterling.


The value is that at the time of the transaction. This is especially important for VAT because invoices must show values in a recognised currency.


If your business owns cryptoassets at the end of an accounting period, it must show their monetary value at that date in your accounts balance sheet. For UK tax returns this must be shown in sterling.


No effect on VAT


VAT is due in the normal way on goods or services you sell in exchange for cryptoassets. It applies to the value of the transaction (in sterling) at the time of the transaction. If you’re the seller you’ll need to make the valuation to show the VAT amount in sterling (or for overseas sales another recognised currency) on your invoice. You can’t show the value of the sale or the VAT in, say, bitcoin.


Investing in cryptoassets


Other than where you use cryptoassets as a means of payment, buying or selling them is a capital transaction. That means gains resulting from buying, selling or changing values of cryptoassets by companies are liable to corporation tax. Owners of unincorporated businesses are liable to capital gains tax on gains made from the sale of cryptoassets. Gains from changes in value aren’t taxable until there’s an actual sale.


Buying and selling and data mining


If you or your company frequently trade in cryptoassets, or if you “mine” them, any gains you make are taxable as profits rather than as capital gains.


For VAT and direct tax purposes all transactions in cryptoassets must be given a value in a recognised currency, e.g. sterling. If your business makes a profit from owning cryptoassets, it usually counts as a capital gain and so is liable to corporation tax for companies and capital gains tax for other businesses.


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