In jolly good news, Her Majesty's Revenue & Customs has provided updated taxation guidance for cryptocurrency businesses operating in the UK. Guidance was first provided in December 2018 for individuals but this latest update covers businesses and companies.
While HMRC endorses the categorisation of tokens as "Exchange Tokens", "Utility Tokens" and "Security Tokens" by the UK government's cryptoasset task force, for taxation:
HMRC will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place (rather than by reference to terminology)
Similar to the Australian position, tokens being used as barter will be need to be treated as income:
if a company carrying on a trade accepts exchange tokens as payment from customers, or uses them to make payments to suppliers, the tokens given or received will need to be accounted for within the taxable trading profits.
For mining, HMRC says that an individual mining will need to declare the token value received from mining as income, but that a mining operation running like a business will be more likely treated as being involved in trading. Given the difficulty in keeping records for tax of point in time pricing for mining, HMRC is discouraging incidental crypto mining with this interpretation. The far more sensible approach would appear to be to treat the token is a zero cost base capital asset and tax the gain on disposal.
For corporations tax, HMRC suggests the default position is that most trading of exchange tokens will be a capital gain event because tokens have no status as money or currency at UK tax law.
Forks are sensibly addressed by those holding tokens on exchanges which don't recognise a hard fork not being liable for tax for a token they don't receive, but if they hold their tokens off exchange a fork would require an apportionment of expenses between the new crypto assets.
Value Added Tax remains exempted from cryptocurrency exchange transactions, mirroring the position in Australia.
HMRC goes into a little detail on issues of token value falling to a negligible level (for example if a token is delisted from exchanges and ceases having any real value) or if a private key is lost, as UK law permits a "negligible value claim" to be made in respect of an asset which drops to effectively zero value.
When it comes to paying staff in cryptocurrencies, exchange tokens will be treated as "readily convertible" and so analogous to payment in money, with associated tax withholding being required.
One aspect which is very consistent in tax guidance for crypto-assets around the world is the need for record-keeping, lest a taxpayer be on the receiving end of unexplained wealth allegations:
The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include: * the type of cryptoasset * date of the transaction * if they were bought or sold * number of units * value of the transaction in pound sterling * cumulative total of the investment units held * bank statements and wallet addresses, if needed for an enquiry or review
Which we might just summarise as follows:
