Crypto taxes for businesses in the UK – A simplified guide

Crypto taxes in UK

This article (Updated Nov 2019) simplifies the tax guidance on cryptoasset activities undertaken by businesses in the UK. We discuss pressing issues such as how to calculate your gains/losses, what accounting inventory method is recommended, how to account for payrolls in cryptos, and specific use cases such as DeFi lending products, cryptocurrency exchanges and mining companies.

We have referred the new UK ‘Cryptoassets: tax for businesses‘ policy document, and also updated inputs from recent legal statements such as the UK Law Panel Defining Crypto Assets as Property

We would suggest you discuss these points with your (in-house or outsourced) accounting team, set up a regular bookkeeping and tax reporting process, and then use an online tool (such as cryptio) to automatically track and record all your transactions according to your accounting and reporting process. 

P.S. If you stick till the end, there is a sweet reward for your perseverance! – a free downloadable bookkeeping checklist for your cryptocurrency business that breaks down the key steps you need to do to stay on top of your tax reporting and accounting. 

I. Taxable activities and events involving cryptocurrencies include buying and selling exchange tokens, exchanging tokens for other assets (including other types of cryptoassets), ‘mining’, and providing goods or services in return for exchange tokens

II. The calculation of a company’s taxable profits will be undertaken in pounds sterling. 

  • The value of any profit or gain (or loss) will need to be converted into pounds sterling using the appropriate rate at the date and time of each transaction. 
  • If the transaction does not have a pound sterling value (for example, if bitcoin is exchanged for ether), an appropriate exchange rate must be established in order to convert the transaction to pounds sterling.

  • Individuals and companies must also keep records of the valuation methodology and the exchange rates used
III. If such a company whose core activity is, say, manufacturing such as retail of furniture, acquires a large holding of bitcoin through payment for goods that it does not spend, or convert to flat currency, then it may have an additional activity of investing and any subsequent disposal will be a chargeable event.
 
IV. Companies are subject to Corporation Tax on their profits and gains.
 
  • If the activity concerning the exchange token is not a trading activity, for example the activity falls under loan relationship or intangible fixed asset rules, then the activity will be charged to Corporation Tax as a chargeable gain from the disposal of a capital asset.
  • Businesses and companies can crystallise losses for exchange tokens that they still own if they become worthless or of ‘negligible value’. The disposal produces a loss that needs to be reported. 
V. Calculating capital gains/losses
 
  • The gains or losses are calculated by taking into account the value of the asset at the time of disposal (consideration), and then removing the ‘allowable costs’ that includes the price originally paid for the asset.
Other costs that come under ‘allowable costs’ can be deducted from the gain/loss calculations:
 
  • transaction fees paid before the transaction is added to a blockchain
  • advertising for a purchaser or a vendor
  • professional costs to draw up a contract for the acquisition or disposal of the exchange tokens
  • costs of making a valuation or apportionment to be able to calculate gains or losses
A ‘disposal’ is a broad concept and includes:
 
  • selling crypto tokens for money
  • exchanging exchange tokens for a different type of cryptoasset
  • using exchange tokens to pay for goods or services
  • giving away exchange tokens to another person  
VI. Accounting method for calculating gains/losses
 
For simpler tax calculations, instead of tracking the gain or loss for each transaction and each digital asset individually, each type of exchange token is kept in a ‘pool’.
 
For example, if a person owns bitcoin, ether and litecoin, they would have three pools and each one would have its own ‘pooled allowable cost’ associated with it.
 
The ‘pooled allowable cost’ is calculated as the sum of the acquisition costs of all the assets in a single ‘pool’. 
  • For example, if V Ltd bought 100 token A for £1,000 and a year later bought a further 50 token A for £125,000, it is treated as having a single pool of 150 of token A and total allowable costs of £126,000.
If some of the tokens from the pool are sold, this is considered a ‘part-disposal’. A corresponding proportion of the pooled allowable costs would be deducted when calculating the gain or loss. 
  • For example, if V Ltd sells 50 of its 150 token A for £300,000, the ‘pooled allowable cost’ would be (126,000£/150)x50 = 42,000£. 
  • After the sale, V Ltd will be treated as having a single pool of 100 token A and total allowable costs of 126,000£ – 42,000£ = 84,000£.
There are 2 exceptions to this wherein the new exchange tokens and the costs of acquiring them stay separate from the main pool.
 
  1. If a company acquires and disposes the token type on the same day (even if the disposal took place first), the disposal is matched with the same-day acquisition in priority to any tokens held in an existing pool.
  2. If a company acquires tokens but within 10 days makes a disposal of tokens of the same type, then that disposal is matched with the acquisition within the previous 9 days in priority to any tokens held in an existing pool. If there has been more than one acquisition within that period, then this rule applies on a ‘first in, first out’ (FIFO) basis.
VII. The Taskforce of the Lawtech Delivery Panel  has recognised cryptoassets as ‘tradable property’ and smart contracts as enforceable agreements under the English law
 
  • The implication of smart contracts having the same legal validity as normal contracts is that they can used as derivatives within an investment fund’s portfolio.
VIII. Special use case: Decentralized finance (DeFi) lending companies
 
  • In case of a company doing crypto lending and loans, if exchange tokens have been provided as collateral security for an ordinary loan of FIAT money, ‘loan relationship’ rules will apply (whether the company is the debtor or creditor).
  • However, if the loan constitutes of exchange tokens, as opposed to traditional currency, then ‘loan relationship’ rules won’t apply. In this case the normal Corporation Tax calculations on gains will apply.
 
IX. Special use case: Mining companies
 
  • In case the cryptoassets awarded for successful mining are not used for trading, their value (at the time of receipt) will generally be taxable as miscellaneous income, with any appropriate expenses reducing the amount chargeable.
  • If the mined tokens are used for trading purposes, the exchange tokens will initially form part of trading stock. The miners will have to pay Capital Gains Tax or Corporation Tax on chargeable gains when they later dispose of their awarded assets
  • The costs of mining activities (for example equipment and electricity) are not deducted from the costs when calculating the gain or loss for Corporation Tax and Capital Gains Tax purposes.
  • Exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT 
 
X. Special use case: VAT charges for cryptocurrency exchanges  
 
The financial services supplied by bitcoin exchanges – exchanging bitcoin for legal tender and vice versa – are exempt from VAT.
 
 
XI. Hard Fork & Airdrops
 
The value of the new cryptoassets created after a hardfork is derived from the original cryptoassets already held by the company. 
 
  • The new cryptoassets created will go into their own pool. Any allowable costs for pooling of the original cryptoassets are split between the pools for the original cryptoassets and new cryptoassets
  • The tokens of an airdropped cryptoasset will form their own pool, unless the recipient already holds tokens of that cryptoasset (in which case the airdropped tokens will go into the existing pool).
 
XII. Employee payments in cryptocurrencies
 
  • If an employer ‘pays’ exchange tokens as employment income to an employee, these exchange tokens are subject to PAYE Income Tax and Class 1 National Insurance contributions.
  • The employee is obliged to ‘make good’ these deductions their employer has paid on their behalf within 90 days after the end of the tax year. If the employee fails to do so, a further charge to Income Tax and both Primary and Secondary Class 1 National Insurance contributions will arise on those liabilities.
  • If the exchange token is not a readily convertible assets, that is no trading arrangement exists to enable the tokens to be converted into their monetary value, then the employer does not have to apply PAYE Income Tax and Class 1 National Insurance contribution deductions. 
  • However, the employee must pay any Income Tax liability arising on the income received in the form of exchange tokens even if they are not readily convertible through Self Assessment tax return.
  • Employers cannot make a contribution to a registered pension scheme with exchange tokens. 
 
XIII. Venture capital schemes and tax reliefs
 
The schemes do not include any cryptoasset-specific conditions, and HMRC’s approach is to review cryptoasset or distributed ledger technology cases in the same way as any other business.
 
There are a range of tax reliefs available to all businesses in the UK, including crypto businesses. There are no provisions that that refer to cryptoassets in particular.
 

Conclusion

If you are still reading this, well done! We hope you feel a little bit more comfortable regarding taxes and compliance on your crypto business. As promised, here is the bookkeeping checklist to get you started on setting up an accounting and reporting process for all your cryptocurrency activity!

In case you need more information, don’t hesitate to reach out via the form below!

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