HMRC confirms that cryptoassets are not considered to be money or currency for tax purposes.

By Karl Mah and Amy Watkins

On 1 November 2019, HM Revenue & Customs (HMRC) issued a policy paper on the taxation of cryptoassets for businesses and companies. This follows guidance issued by HMRC in December 2018 for individuals holding cryptoassets. The new guidance does not contain any major surprises and generally follows, but elaborates on, the principles laid down in the initial guidance. It is useful as it provides further clarity for companies undertaking transactions involving cryptoassets and gives tax advice in respect of certain scenarios involving cryptoassets, such as blockchain forks. It addresses not only the corporation tax consequences of transactions involving cryptoassets, but also the stamp tax consequences, the VAT implications, and certain employment tax considerations.

The policy paper deals specifically with the tax treatment of exchange tokens (e.g., Bitcoin). It does not apply to the issue of tokens under initial coin offerings or other similar events. The tax treatment of security tokens and utility tokens is to be addressed in future guidance.

Notably, the policy paper confirms that HMRC does not consider any of the current types of cryptoassets to be money or currency for tax purposes. Therefore, any corporation tax legislation that relates solely to money or currency does not apply to exchange tokens or other types of cryptoassets. For example, a loan of exchange tokens is unlikely to constitute a “loan relationship” for tax purposes; therefore, in most cases such a loan will not be taxed in the same way as other corporate finance transactions.

The acquisition and disposal of cryptoassets generally falls within the income tax regime or chargeable gains regime (i.e., the corporation tax equivalent of the capital gains tax regime). The question of whether a trade is being carried on — which is determined using general principles — is a key factor in ascertaining the correct tax treatment. If a person or business’s activity amounts to a trade, the receipts and expenses will form part of the calculation of trading profit. If the activity concerning the exchange token is not a trading activity, but rather an investment activity (and is not charged to corporation tax in another way, such as under the non-trading loan relationship or intangible fixed assets rules), then any gain arising from the disposal of the cryptoassets is a chargeable gain.

HMRC notes that the cryptoassets sector is fast-moving and developing all the time, and therefore HMRC’s view may evolve further as the sector develops.