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This publication is available at https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-tax-for-businesses
This paper explains how HMRC will tax transactions involving cryptoasset exchange tokens that are undertaken by companies and other businesses (including sole traders and partnerships). It does not apply to the issue of tokens under initial coin offerings or other similar events.
Although HMRC recognises other types of cryptoasset, this paper deals specifically with the tax treatment of exchange tokens (for example, bitcoin). The tax treatment of security tokens and utility tokens will be addressed in future guidance.
This paper is based on the law as at the date of publication. In cases where there is (or may have been) avoidance of tax, the application of the law (including anti-avoidance provisions) may result in a different tax treatment.
The cryptoassets sector is fast-moving and developing all the time. The terminology, types of coins, tokens and transactions can vary. The tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used. As such, 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).
HMRC’s views may evolve further as the sector develops.
Read more about:
Which taxes apply
If a company or business is carrying out activities which involve exchange tokens, they are liable to pay tax on them.
Such activities include:
- buying and selling exchange tokens
- exchanging tokens for other assets (including other types of cryptoassets)
- providing goods or services in return for exchange tokens
The type of tax will depend on who is involved in the business and the activities it carries out (including whether these count as a trade).
It is likely they will be liable to pay one or more of the following:
- Capital Gains Tax
- Corporation Tax
- Income Tax
- National Insurance contributions
- Stamp Taxes
The amount of tax a business must pay will depend on its income, expenditure, profits and gains. These must be declared annually to HMRC on either:
- Self Assessment tax return (for sole traders and partnerships)
- Company Tax Return (for companies)
HMRC will consider each case on the basis of its own facts and circumstances. It will apply the relevant legislation and case law to determine the correct tax treatment (including where relevant, the contractual terms regulating the exchange tokens).
Filling in tax returns
The calculation of an individual’s or a company’s taxable profits will be undertaken in pounds sterling. However, exchange tokens (including bitcoin) can be traded on exchanges which may not use pounds sterling. 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.
The value of any profit or gain (or loss) will need to be converted into pounds sterling for the purposes of filling in a tax return. Any profit or gain must be calculated by converting to pounds sterling using the appropriate rate at the time of each transaction. Reasonable care needs to be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. Individuals and companies must also keep records of the valuation methodology.
A company may make an election to designate a non-sterling currency as its functional currency. In these circumstances the transactions need to be converted to the functional currency using the appropriate rate at the time of each transaction. At the end of the accounting period the necessary steps will need to be completed to complete the tax return in pounds sterling. Further detail is available in HMRC’s Corporate Finance Manual (CFM64100).
Trading in exchange tokens
As with the tax analysis of other types of business the question of whether a trade is being carried on is a key factor in determining the correct tax treatment.
Whether the buying and selling of exchange tokens amounts to a trade depends on a range of factors including:
- degree and frequency of activity
- level of organisation
- intention (including risk and commerciality)
If a person or business’s activities amount to a trade, the receipts and expenses will form part of the calculation of the trading profit. If a trade is carried on through a partnership (or is treated for tax purposes as being so), the partners will be taxed on their share of the trading profit of the partnership.
If the exchange tokens are held as part of an existing trade, profits of a revenue nature will need to be included in the trading profits. For example, 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.
If the activities do not amount to a trade, businesses must still consider if other legislation applies.
Cryptoassets can be awarded to ‘miners’ in return for verifying additions to the distributed ledger. Whether such activity amounts to a taxable trade (with the cryptoassets as trade receipts) will depend on the particular facts - taking into account a range of factors such as:
- degree and frequency of activity
- level of organisation
For example, using a home computer while it has spare capacity to mine tokens would not normally amount to a trade. However, purchasing a bank of dedicated computers to mine tokens for an expected net profit (taking account the cost of equipment and electricity) would probably constitute trading activity.
If the mining activity does not amount to a trade, the value (at the time of receipt) of any cryptoassets awarded for successful mining will generally be taxable as miscellaneous income, with any appropriate expenses reducing the amount chargeable.
If the activity does amount to a trade, any profits must be calculated according to the relevant tax rules.
If the miner keeps the awarded assets, they may have to pay Capital Gains Tax or Corporation Tax on chargeable gains when they later dispose of them.
Accounting practices for calculating trading profits
Generally, for Income Tax or Corporation Tax, profits from a trade involving cryptoassets must be calculated in accordance with generally accepted accounting practice (GAAP), subject to any adjustment required or authorised by law.
For tax purposes, GAAP means either:
- UK generally accepted accounting practice (UK GAAP)
- for companies or other entities which prepare their accounts in accordance with international accounting standards (IAS), generally accepted accounting practice in relation to such accounts
If tax legislation requires or permits a different basis of calculation, the relevant rules must be followed.
Companies are subject to Corporation Tax on their profits and gains. Corporation Tax also applies to companies that are members of a partnership or a limited liability partnership in respect of their share of the partnership profits and gains.
When calculating their Corporation Tax, companies must take into account all of the exchange token transactions they have carried out (as they would with any other type of asset).
It is important to note that HMRC does not consider any of the current types of cryptoassets to be money or currency.
This means that any Corporation Tax legislation which relates solely to money or currency does not apply to exchange tokens or other types of cryptoasset. For example:
- the foreign currency rules (section 328 of the Corporation Tax Act 2009)
- the Disregard Regulations relating to exchange gains and losses (Statutory Instrument 2004/3256)
- designated currency elections (section 9A of the Corporation Tax Act 2010)
If the activity concerning the exchange token is not a trading activity, and is not charged to Corporation Tax in another way (such as the non-trading loan relationship or intangible fixed asset rules) then the activity will be the disposal of a capital asset and any gain that arises from the disposal would typically be charged to Corporation Tax as a chargeable gain.
The loan relationship rules (Corporation Tax Act 2009 Part 5) explain how Corporation Tax is charged on the profits and deficits a company makes from its loan relationships.
A company has a ‘loan relationship’ if it has a money debt that has arisen from a transaction for the lending of money. This will be the case where it has lent or borrowed money.
More information about the loan relationship rules is in HMRC’s Corporate Finance Manual (CFM30000)
HMRC does not consider exchange tokens to be money. In addition, there is typically no counterparty standing behind the token and, as such, it does not seem that the token constitutes a debt. This means that exchange tokens do not create a loan relationship.
In addition, there are rules (Corporation Tax Act 2009 Part 6) that bring certain other items into the loan relationship rules. These rules will not generally apply to exchange tokens. In particular no money debt will typically exist and it is HMRC’s view that exchange tokens do not constitute currency. More information about deemed loan relationships is in HMRC’s Corporate Finance Manual (CFM40000).
Acquiring exchange tokens
The acquisition of exchange tokens generally does not involve entering into a loan relationship. This is because there is usually no one backing the exchange token and therefore there is no money debt.
As a result, there is no loan relationship in relation to the exchange token and so the loan relationship rules do not apply.
Loans backed by exchange tokens as securities/collateral
If exchange tokens have been provided as collateral security for an ordinary loan (of money), a loan relationship exists and the loan relationship rules will apply (whether the company is the debtor or creditor).
Loans of exchange tokens
If exchange tokens are loaned - as opposed to traditional currency - it is unlikely that this would constitute a loan relationship. In particular, given that the tokens would not represent an amount of money or currency:
- there would not be a money debt
- there would not have been a transaction for the lending of money
Intangible fixed assets
If the conditions in this section are met the Corporation Tax rules for intangible fixed assets (Corporation Tax Act 2009 Part 8) have priority over the chargeable gains rules. More information about these rules can be found in HMRC’s Corporate Intangibles Research and Development Manual (CIRD10000).
Companies that account for exchange tokens as ‘intangible assets’ may be taxed under Corporation Tax rules for intangible fixed assets if the token is both:
- an ‘intangible asset’ for accounting purposes
- an ‘intangible fixed asset’ (This means it has been created or acquired by a company for use on a continuing basis. Exchange tokens which are simply held by the company, even when held in the course of its activities, will not meet this definition)
In addition, there are further specific exclusions for:
- financial assets
- non-commercial assets
- assets that derive rights or value from certain excluded assets (such as tangible assets, rights in companies, trusts, partnerships).
If the company does not prepare GAAP-compliant accounts, the rules apply as if GAAP-compliant accounts had been prepared.
Exchange tokens that meet the conditions above are treated the same as other intangible assets.
Investments (chargeable gains)
All exchange tokens are digital and therefore intangible. However, they count as a ‘chargeable asset’ for Capital Gains Tax and Corporation Tax on if they are both:
- capable of being owned
- have a value that can be realised
If a company holds exchange tokens as an investment, they are liable to pay Corporation Tax on any gains they realise when they dispose of it.
If a partnership or a limited liability partnership holds exchange tokens as an investment, the partners (or members) are liable to pay Corporation Tax (if they are a company) or Capital Gains Tax (if they are an individual) on any gains they realise.
A person must calculate their gain or loss when they dispose of their exchange tokens to find out whether they need to pay Capital Gains Tax or Corporation Tax.
What constitutes a disposal
A ‘disposal’ is a broad concept and includes:
- selling exchange 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
If a company gives away exchange tokens to another company which is not a member of the same group, or to an individual or other entity, the company making the disposal must work out the market value of what it gave away. It must then use this to calculate any chargeable gain. Similarly, the recipient is treated as having acquired the cryptoassets at their market value at the time of the gift.
If a company disposes of exchange tokens to charity, they will not have to pay Corporation Tax on any gain that has accrued. This does not apply if either:
- they make a ‘tainted donation’
- the company disposes of the tokens to the charity for more than the acquisition cost (so that they realise a gain)
Certain costs can be allowed as a deduction when calculating if there’s a gain or loss, which include:
- the consideration (in pounds sterling) originally paid for the asset
- 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
The costs of mining activities (for example equipment and electricity) do not constitute allowable costs when calculating the gain or loss for Corporation Tax and Capital Gains Tax purposes, because they’re not wholly and exclusively to acquire the exchange tokens, and so cannot satisfy the requirements of section 38(1)(a) of the Taxation of Chargeable Gains Act 1992. If the mining activity is part of a trade, it may be possible to deduct some of these costs against trading profits.
If the mining amounts to a trade for tax purposes, the exchange tokens will initially form part of trading stock. If these exchange tokens are transferred out of trading stock (for example, to be held as an investment) this will count as a sale at market value for trading purposes, on which a profit or loss will need to be calculated. When the exchange token is subsequently disposed of, the acquisition cost in the Corporation Tax or Capital Gains Tax computation will be the market value at the date the token was taken out of trading stock. More information is in the HMRC Capital Gains Manual (CG69220).
Similarly, if exchange tokens held as an investment are transferred to trading stock, the transfer is dealt with for trading profits as if there were a sale and purchase at market value. For Corporation Tax and Capital Gains Tax purposes, the asset is deemed to have been sold for its open market value at the date of the transfer, although an election is available to defer any resulting charge until the exchange tokens are actually sold. More information is in the HMRC Capital Gains Manual (CG69200).
Pooling provides for simpler tax calculations which apply to shares and securities of companies and also any other assets ‘where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired’ (section 104 of the Taxation of Chargeable Gains Act 1992). HMRC believes exchange tokens fall within this description, meaning they must be pooled.
Instead of tracking the gain or loss for each transaction individually, each type of exchange token is kept in a ‘pool’. The consideration (in pounds sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’.
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. This pooled allowable cost changes as more tokens of that particular type are acquired and disposed of.
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.
Businesses must still keep a record of the amount spent on each type of exchange token, as well as the pooled allowable cost of each pool.
V Ltd bought 100 token A for £1,000. A year later V Ltd bought a further 50 token A for £125,000. V Ltd is treated as having a single pool of 150 of token A and total allowable costs of £126,000.
A few years later V Ltd sells 50 of its token A for £300,000. V Ltd will be allowed to deduct a proportion of the pooled allowable costs when working out its gain:
|Less allowable costs||£126,000 x (50/150)||£42,000|
V Ltd will have a gain of £258,000 and will need to pay CT on this. After the sale, V Ltd will be treated as having a single pool of 100 token A and total allowable costs of £84,000.
If V Ltd then sold all 100 of its remaining token A then it can deduct all £84,000 of allowable costs when working out the gain.
Pooling rules: exceptions for companies
There are 2 exceptions to the pooling rules, which mean that the new exchange tokens and the costs of acquiring them stay separate from the main pool.
Firstly, if a company acquires tokens on the same day that they dispose of tokens of the same type (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.
Secondly, if a company acquires tokens that would otherwise create or be added to a pool but within ten 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’ basis.
The gain or loss should be calculated using the costs of the new tokens of the cryptoasset that are kept separate.
If the number of tokens disposed of exceeds the number of new tokens acquired, the calculation of any gain or loss may also include an appropriate proportion of the pooled allowable cost.
M Ltd holds 14,000 token B in a pool. It spent a total of £200,000 acquiring them, which is the pooled allowable cost.
On 30 August 2018 M Ltd buys 500 token B for £17,500.
Then on 4 September 2018 M Ltd sells 4,000 tokens B for £160,000.
As the disposal is of tokens acquired in the previous 9 days the 500 new tokens bought on 30 August 2018 do not go into the pool. Instead, M Ltd is treated as having sold:
- the 500 tokens it recently bought
- 3,500 of the tokens already in the pool
M Ltd will need to work out its gain on the 500 token B as follows:
|Consideration||£160,000 x (500 / 4,000)||£20,000|
|Less allowable costs||£17,500|
M Ltd will also need to work out its gain on the 3,500 token B sold from the pool as follows:
|Consideration||£160,000 x (3,500 / 4,000)||£140,000|
|Less allowable costs||£200,000 x (3,500 / 14,000)||£50,000|
M Ltd still holds a pool of 10,500 token B. The pool has allowable costs of £150,000 remaining.
If a business or company disposes of exchange tokens for less than their allowable costs, they will have a loss. Certain ‘allowable losses’ can be used to reduce the overall gain, but the losses must be reported to HMRC first.
There are special rules for losses when disposing of exchange tokens to a ‘connected person’.
Claiming for an asset that’s lost its value
As with other types of assets, businesses and companies can crystallise losses for exchange tokens that they still own if they become worthless or of ‘negligible value’.
A negligible value claim treats the exchange tokens as being disposed of and re-acquired at an amount stated in the claim. As exchange tokens are pooled, the negligible value claim needs to be made in respect of the whole pool, not the individual tokens.
The claim will need to state the:
- asset which is the subject of the claim
- amount the asset should be treated as disposed of for (which may be £0)
- date that the asset should be treated as disposed of
The disposal produces a loss that needs to be reported to HMRC. Negligible value claims can be made to HMRC at the same time as reporting the loss.
More information about negligible value claims can be found in HMRC’s Capital Gains manual (CG13120P).
Some cryptoassets are not controlled by a central body or person, but operate by consensus amongst that cryptoasset community. When a significant minority of the community want to do something different they may create a ‘fork’ in the blockchain.
There are 2 types of forks:
- a soft fork
- a hard fork
A soft fork updates the protocol and is intended to be adopted by all. No new types of token or blockchain are expected to be created.
A hard fork is different and can result in new types of token coming into existence. Before the fork occurs there is a single blockchain. Usually, at the point of the hard fork a second branch (and therefore a new type of cryptoasset) is created.
The blockchains for the original and the new types of cryptoasset have a shared history up to the fork. If an individual or company held tokens of the cryptoasset on the original blockchain, they will usually hold an equal number of tokens on both blockchains after the fork.
The value of the new cryptoassets is derived from the original cryptoassets already held by the company. This means that Section 43 Taxation of Chargeable Gains Act 1992 will apply and so after the fork the new cryptoassets need to go into their own pool. Any allowable costs for pooling of the original cryptoassets are split between the pools for the:
- original cryptoassets
- new cryptoassets
If a person holds cryptoassets through an exchange, the exchange will make a choice whether to recognise the new cryptoassets created by the fork.
New cryptoassets can only be disposed of if the exchange recognises them. If the exchange does not recognise the new cryptoasset it does not change the position for the blockchains, which will show an individual or company as owning units of the new cryptoasset. HMRC will consider cases of difficulty as they arise.
Costs must be split on a just and reasonable basis under section 52(4) of the Tax and Capital Gains Act 1992. HMRC does not prescribe any particular apportionment method. HMRC has the power to enquire into an apportionment method and may do so where it believes that the method is not just and reasonable.
An ‘airdrop’ is when someone receives an allocation of tokens or other cryptoassets, for example, when tokens are given as part of a marketing or advertising campaign.
The airdropped cryptoasset, typically, has its own infrastructure (which may include a smart contract, blockchain or other form of distributed ledger technology that operates independently of the infrastructure for an existing cryptoasset.
The tokens of the airdropped cryptoasset will need to go into their own pool unless the recipient already holds tokens of that cryptoasset (in which case the airdropped tokens will go into the existing pool). The value of the airdropped cryptoasset does not derive from an existing cryptoasset held by the individual or company, so section 43 of the Taxation of Chargeable Gains Act 1992 does not apply.
VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.
The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.
For VAT purposes, bitcoin and similar cryptoassets are to be treated as follows:
- exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that:
- the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and
- there is no customer for the mining service
- when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
- charges (in whatever form) made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the conditions outlined in VAT Finance manual (VATFIN7200), will be exempt from VAT under Item 5, Schedule 9, Group 5 of the Value Added Tax Act 1994.
The VAT treatments outlined above are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions.
In 2014, HMRC decided that under Item 1, Group 5, Schedule 9 of the Value Added Tax Act 1994, the financial services supplied by bitcoin exchanges - exchanging bitcoin for legal tender and vice versa - are exempt from VAT.
This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). Mr Hedqvist planned to set up a business which would exchange traditional currency for bitcoin and vice versa. Mr Hedqvist did not intend to charge a fee for this service but rather to derive a profit from the ‘spread’ (the difference between his purchase and sell price).
Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.
The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services effected for consideration.
The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under Article 135(1) (e) of the VAT Directive.
A supply of any services required to exchange exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under Item 1, Group 5, Schedule. 9, of the Value Added Tax Act 1994.
Venture capital schemes and tax reliefs
Cryptoassets and distributed ledger technology are increasingly being used by innovative early-stage businesses. HMRC has received applications from such companies seeking tax-advantaged investment status under venture capital schemes such as:
The company, investor and proposed investment must meet the conditions of the scheme opted for. 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.
Meeting the qualifying conditions of a venture capital scheme
Much of the guidance elsewhere in this policy paper will be relevant to whether a company meets the qualifying conditions of the venture capital schemes. For example, a core condition of the schemes is that a company must be carrying on a qualifying ‘trade’: a trade that is conducted on a commercial basis with a view to the realisation of profits. In applying this test, HMRC will take the approach outlined in the venture capital scheme guidance.
Given the diversity of activities that companies undertake involving exchange tokens and distributed ledger technology, and the rapid pace at which the sector is evolving, HMRC cannot provide detailed guidance on every situation.
However, none of the following activities will in themselves stop a business from meeting the qualifying conditions:
- providing goods or services to customers that are operating in the exchange tokens sector (for example manufacturing and selling computer hardware that is optimised for exchange token mining)
- accepting exchange tokens as payment for goods or services
- using distributed ledger technology as a means of recording or publishing information
This is because these activities are related to a core business activity such as manufacturing or retailing. If that core activity is a qualifying trade, HMRC would not expect the exchange tokens or distributed ledger technology activity to change that.
On the other hand, the treatment of the following types of activity is less certain:
- dealing in exchange tokens on one’s own account
- exchanging or broking exchange token transactions
- mining exchange tokens
These are genuinely novel activities and applicant should carefully consider the circumstances against the scheme conditions, in particular the trading requirement and the excluded activities list (sections 181 and 192 of the Income Tax Act 2007).
‘Mixed’ activities should also be considered carefully. For example, a company making and selling furniture might accept bitcoin as payment. Although the core activity is the manufacturing and retail of furniture, if the company acquires a large holding of bitcoin 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.
Asking for assurance from HMRC in advance
HMRC operates a non-statutory advance assurance service for the venture capital schemes. This allows companies to request HMRC’s opinion on whether they qualify for the schemes in advance of an investment being received.
In some circumstances HMRC may decline to give an opinion in response to an advance assurance request because the factual uncertainty involved is too great. Such cases are rare. This is a general feature of the venture capital advance assurance service and is not specific to exchange tokens. However, given the rapid pace of development of the industry, HMRC expects that, early on, there will be a number of exchange tokens cases that fall into this category.
A range of tax reliefs are available if certain conditions are met regarding the activities of a particular individual or business. These include:
- enterprise investment scheme
- seed enterprise investment scheme
- venture capital trust scheme
- reliefs for gifts of business assets
- business property relief
This policy paper does not discuss each of these specifically in the context of cryptoassets, as they all employ their own distinct eligibility criteria.
As with the venture capital schemes discussed above, there are no provisions within the legislation for these reliefs that refer to cryptoassets in particular. HMRC’s approach is to review cases that involve cryptoassets in the same way as any other cases. If, after consulting the relevant HMRC guidance, there remains genuine uncertainty as to the availability of a particular relief, clearance can be sought using the Non-Statutory Clearance Service.
‘Paying’ employees in cryptoassets
If an employer ‘pays’ exchange tokens as earnings to an employee, those exchange tokens count as ‘money’s worth’ and are subject to Income Tax and National Insurance contributions on the value of the asset.
More information about what counts as earnings for tax purposes is in HMRC’s Employment Income Manual (EIM00520).
How to account for the income tax and National Insurance contributions depends on whether the exchange tokens are readily convertible assets. In particular, exchange tokens are readily convertible assets if trading arrangements exist, or are likely to come into existence, the effect of which is to enable the tokens to be converted into their monetary value. There is more information about what constitutes a readily convertible assets in HMRC’s Employment Income Manual (EIM11900). HMRC considers that exchange tokens generally will be readily convertible assets.
Exchange tokens provided in the form of readily convertible assets
When providing a notional payment in the form of a readily convertible asset to an employee, the employer will need to establish if that notional payment constitutes a payment of employment income, for example, to the employee for both:
- income tax purposes (under Section 62 of the Income Tax (Earnings and Pensions) Act 2003)
- National Insurance contribution purposes (under Section 3 of the Social Security Contributions & Benefits Act 1992)
There is more information about this in HMRC’s Employment Income Manual (EIM11956).
PAYE and National Insurance contributions
If it does constitute employment income, the employer will need to apply a valuation to that readily convertible asset using their best estimate and then subject it to the appropriate PAYE Income Tax and Class 1 National Insurance contribution deductions, which the employer should then report and pay over to HMRC in accordance with the real time reporting provisions.
The employee is obliged to ‘make good’ the Income tax and employee Class 1 National Insurance contribution deductions their employer has paid on their behalf. If the employee does not make good those amounts within 90 days after the end of the tax year in which the notional payment is made, a further charge to Income Tax and both Primary and Secondary Class 1 National Insurance contributions will arise on those liabilities which the employee has not ‘made good.’
Read more about paying employees in shares, commodities or other non-cash pay.
The employer would also need to establish if providing the cryptoasset fell to be earnings for National Insurance contribution purposes under Section 3 of the Social Security Contributions and Benefits Act 1992, and if so, the earnings period when it would be subject to National Insurance contributions. That would determine the amount of Class 1 National Insurance contributions arising on those which then needs to be paid and reported to HMRC (via PAYE/Real Time Information).
Exchange tokens which are not readily convertible assets
If the exchange token is not a readily convertible assets, the employer does not have to apply PAYE Income Tax and Class 1 National Insurance contribution deductions.
However, the employee must declare any amount received in the form of exchange tokens on the employment pages of their Self Assessment tax return and then pay HMRC (via Self Assessment) any Income Tax liability arising on that income.
For National Insurance contributions purposes, if the exchange token is not a readily convertible asset, the employer should treat the payment as being a benefit in kind and pay and report any Class 1A National Insurance contributions arising to HMRC. More information about Class 1A National Insurance contributions is in HMRC’s National Insurance Manual (NIM13000).
Employment income provided through third parties
Under Part 7A of the Income Tax (Earnings and Pensions) Act 2003, if exchange tokens are provided to an employee by a third party, an Income Tax charge may arise.
The employer is required to account to HMRC for the Income Tax due through the operation of PAYE when exchange tokens are provided as employment income. The amount of PAYE income on which the employer must account for Income Tax is based on the best estimate that can reasonably be made. More information is in HMRC’s Employment Income manual(EIM45000).
For National Insurance contributions purposes, if exchange tokens are provided by a third party, the National Insurance contribution liability will continue to arise, however in certain circumstances the third party, rather than the employer, can be liable pay Class 1A National Insurance contributions.
More information is in HMRC’s National Insurance Manual (NIM16350).
Contributions to registered pension schemes
Employers cannot make a contribution to a registered pension scheme with exchange tokens. This is because HMRC do not consider such assets to be currency or money.
Stamp Duty and Stamp Duty Reserve Tax
Stamp Duty is charged on instruments that transfer stocks or marketable securities, and interests in partnerships if the partnership assets include stocks or marketable securities. Stamp Duty Reserve Tax is a related tax and is charged on agreements to transfer chargeable securities.
More information about Stamp Duty and Stamp Duty Reserve Tax is in HMRC’s Stamp Taxes on Shares Manual.
Transfer of exchange tokens
For the transfers of exchange tokens to fall within the scope of Stamp Duty or Stamp Duty Reserve Tax, they would need to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’ respectively.
This will be considered on a case-by-case basis, dependent on the characteristics and nature of the cryptoasset, rather than any labels attached to them.
However, as of the original date of publication of this paper, HMRC’s view is that existing exchange tokens would not be likely to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’.
Exchange tokens given as Consideration
Exchange tokens could be given as consideration for purchases of ‘stock or marketable securities’ and/or ‘chargeable securities’.
For Stamp Duty, chargeable consideration is ‘money’, ‘stock or marketable securities’ or ‘debt’. For Stamp Duty Reserve Tax it is defined as ‘money or money’s worth’.
If exchange tokens are given as consideration, this would count as ‘money’s worth’ and so be chargeable for Stamp Duty Reserve Tax purposes. Tax will be due based on the pound sterling value of the exchange tokens at the relevant date.
HMRC does not consider exchange tokens to be currency or money, so they do not meet the definition of ‘money’ for Stamp Duty consideration purposes. They will also generally not count as ‘stock or marketable securities’.
Broadly, ‘debt’ counts as chargeable consideration for Stamp Duty in the following scenarios:
- release of a debt – The seller has an outstanding debt to the purchaser (which could be in the form of exchange tokens). The seller transfers shares to the purchaser, and in consideration the purchaser releases the seller from the debt.
- debt is assumed – A third party has an outstanding debt to the purchaser (which could be in the form of exchange tokens). The seller transfers shares to the purchaser, and in consideration the seller is assigned the right to the debt from the third party.
Stamp Duty Land Tax
Stamp Duty Land Tax is paid on purchases of property or land over a certain price in England and Northern Ireland. More information on Stamp Duty Land Tax is available in HMRC’s Stamp Duty Land Tax Manual.
The tax is different if the property or land is in:
Scotland - pay Land and Buildings Transaction Tax from April 2015
Wales - pay Land Transaction Tax if the sale was completed on or after 1 April 2018
Exchange token transfers
HMRC does not consider transfers of exchange tokens to be land transactions. This means that Stamp Duty Land Tax will not be payable on such transfers.
Exchange tokens given as Consideration
Chargeable consideration for the purposes of Stamp Duty Land Tax comprises anything given for the transaction that is ‘money or money’s worth’. As a general rule, any non-monetary consideration should be valued at its market value on the effective date of the transaction.
Accordingly, if exchange tokens are given as consideration for a land transaction, these would fall within the definition of ‘money or money’s worth’ and so be chargeable to Stamp Duty Land Tax.