Cryptoassets: a new twist in the story
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The Treasury Committee report raises questions about HMRC’s treatment of cryptoassets.
Since cryptoassets came on the scene, there’s been uncertainty about how they are taxed. There is no specific tax legislation regarding these assets. Until rules are introduced, we are left trying to work out how to tax them under current legislation.
There are nearly 23,000 different cryptocurrencies, each with different characteristics. This means they can’t easily be slotted into rules that were largely written before anyone even imagined anything like cryptoassets.
But now that one in ten people in the UK are speculating in cryptoassets, this affects a significant number of taxpayers. Until we have specific regulations, many people will be uncertain as to whether they are dealing correctly with their cryptoassets.
When cryptoassets first rose to prominence, there was much speculation that they would be taxed as gambling. Gambling winnings are not subject to Capital Gains Tax. If cryptoassets were treated as gambling for retail investors, it would mean that no profit would be taxable, and there would be no relief for losses. Effectively crypto would be tax free for the majority.
The HMRC view
HMRC updated its guidance to make clear that they did not consider the purchase or sale of cryptoassets to be gambling.
But last week the UK Treasury Committee equated the crypto industry to gambling. It said: “Unbacked cryptoassets have no intrinsic value, and their price volatility exposes consumers to the potential for substantial gains or losses, while serving no useful social purpose.”
The report added: “These characteristics more closely resemble gambling than a financial service, an impression reinforced by the evidence we have received of consumer behaviour.”
Whilst the Treasury Committee doesn’t create legislation, if this view were adopted, it would take retail cryptoassets outside of the scope of tax. The report is silent on the tax impact, but this leads to uncertainty on the taxation of a very complex set of assets.
HMRC has made clear its view that dealing in cryptoassets is not gambling. And it’s unlikely the HMRC would want to exclude potentially significant sums from people dealing in cryptoassets by treating them as gambling.
The report has also been subject to significant criticism from the crypto industry, with CryptoUK saying: “Does the Government really wish to exclude tens of millions of pounds in tax income from gains made by the buying and selling of unbacked cryptoassets?”
In the 2023 Spring Budget, it was announced that the UK self-assessment tax return would feature a section dedicated to cryptoassets from 2024-25. So we know that they are well and truly on HMRC’s radar. Given the complexity of cryptoassets and the uncertainty about their treatment, it’s important for anyone dealing with them to take appropriate professional advice.
For further guidance on any of the issues raised in this article, please contact Stephen Kenny.