Cryptocurrency holders have long wrestled with their tax obligations. These fiduciary duties have been complicated by tax agencies, which are several steps behind technology and now playing crypto catch-up. Updated guidelines from the U.S. and U.K.’s tax agencies were finally released this year, but the initial relief felt by conscientious bitcoiners was to prove short-lived, for on closer examination, the documentation has left many crypto questions unanswered.
It’s 2019 and Tax Is Still Taxing
The lack of uniformity regarding tax on crypto earnings, with some national governments happy to kick the can down the road and others determined to immediately collect their pound of flesh is frustrating, to put it mildly. The latest guidelines from Her Majesty’s Revenue and Customs (HMRC) for U.K. residents has succeeded in muddying the already-feculent waters.
Once again, a tax authority’s attempt to provide clarity on crypto taxation has become, instead, a wellspring of uncertain questions. It was the same when the IRS published crypto tax guidance in 2014, and again in October of this year. So, why are such powerful arms of the state unable to lay down clearly-defined tax principles on virtual currency? Is it because the powers-that-be do not fully comprehend this rapidly-evolving environment or its underlying technology? Or is it the case that the nature of forks, airdrops and token sales is incompatible with hard-and-fast taxation rules?
Robin Singh is the founder of crypto tax platform Koinly. “Part of the problem,” he explains, “is that regulators do not understand cryptocurrencies. In the latest IRS guidelines, for example, the IRS refers to forked coins as “airdrops after a fork”. They are oblivious to the fact that there is no actual airdrop – the ledger is simply copied. This misinterpretation has given rise to the issue investors now face: paying income tax on forked coins they may have no intentions of using.”
Exchange Tokens ‘Aren’t Currency’
HMRC’s recent update to its guidance on crypto taxes, published on November 1, dealt with crypto transactions carried out by companies, businesses such as partnerships and sole traders, and individuals. In essence, it sought to end confusion about the extent to which cryptocurrency transactions occasion capital gains tax, national insurance contributions, corporation tax, VAT, and income tax.
The main plank of HMRC’s argument is that, generally speaking, “exchange tokens” are not currencies, stock or marketable securities – meaning they are exempt from stamp taxes. Nevertheless, tokens used in debt transactions do incur stamp taxes.
Bitcoin is explicitly mentioned in the policy paper as an example of an exchange token, with security and utility tokens to be dealt with in a future update. Despite the policy paper being entitled “Tax on cryptoassets,” therefore, it is far from comprehensive. And, to quote an instructive line, “The tax policy may evolve as the sector develops.”
Crypto Tax Obligations for Individuals
As it has previously, HMRC was keen to point out that “the tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.” In other words, it’s up to you whether you incur any tax at all.
If you sell exchange tokens that have appreciated in value, they will – as investments – be liable to capital gains tax; income tax and national insurance contributions are also due on crypto assets received from employers as a form of non-cash payment and from mining operations or airdrops.
In instances where individuals essentially act as a business by frequently transacting financial trades involving crypto assets, their taxable trading profits are subject to income tax rather than capital gains tax. Of course, you can reduce your tax liability by offsetting losses against future profits; the cost of the asset itself can be a deduction.
A Thankless Task for Tax Agencies
Because assets such as bitcoin are traded on exchanges which do not use pounds sterling, HMRC’s guidance notes that the value of any gain or loss must be converted to sterling on an individual’s self assessment tax return. The guidance points out that individuals must keep separate records of each crypto asset transaction including type of asset; date of transaction; if they were bought or sold; number of units and value of transaction in sterling; cumulative total of the investment units held; and bank statements and wallet addresses.
Of course, it is easy to pick holes in the guidance. The tax body says that reasonable care should be taken to make “appropriate valuations” for transactions using a consistent methodology. However, it fails to elaborate on what would be appropriate, and which methodology would be permissible. The HMRC also betrays its own ignorance when discussing matters of fraud in the cryptosphere, noting that theft is not considered disposal “as the individual still owns the assets and has a right to recover them.” They may have a right to recover them, but they probably have no prospect of doing so. Victims of theft cannot claim a loss in capital gains tax either.
Crypto Tax Obligations for Businesses
HMRC’s guidance for businesses is, as you might expect, even more complex and confusing than for individuals. Crypto mining companies are subject to tax based on factors including degree and frequency of activity, level of organization, risk and commerciality. But most business activities in the cryptosphere are subject to some form of tax, whether the activity is buying and selling tokens, exchanging tokens for other assets (including other forms of cryptocurrency) and supplying goods and services in return for tokens, the latter of which entails VAT on the “pound sterling value of the exchange tokens at the point the transaction takes place.”
Confusion stems from qualifiers such as “the type of tax will depend on who is involved in the business,” although the process by which accounts should be prepared is, at least, unambiguous: they should follow generally accepted accounting practice (GAAP) or, if relevant, international accounting standards (IAS).
If a business’s activities constitute a trade, receipts and expenses form part of the calculation of the resulting profit. If a partnership conducts the trade, partners will be taxed on their share of the trading profit. And if the activity concerning the exchange token is not deemed “trading activity,” the gain obtained from eventually disposing of a crypto asset will be charged to corporation tax.
Where Do We Go From Here?
The fact that the status of security and utility tokens remains unaddressed indicates that HMRC is continuing to wrestle with fundamental questions about tax on crypto. While these latest directives do answer some long-held queries pertaining to “exchange tokens,” they also throw up others. Is HMRC open to eventually changing their stance that cryptocurrency is not money, for instance? This one will be asked ad infinitum, particularly as merchant adoption increases. For bitcoiners in the U.K., U.S., and other leading crypto countries, divining the intent of the tax agencies has become a dark art.
Do you think tax agencies are at fault for complicating crypto tax guidance, or are they just struggling to keep pace with a rapidly evolving industry? Let us know in the comments section below.
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