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HMRC internal manual

Capital Gains Manual

Introduction and computation: chargeable assets: Intangible assets: Cryptocurrencies


Use is being made of decentralised digital currencies, otherwise known as ‘cryptocurrencies’. Cryptocurrencies are an evolving area and work on determining their legal and regulatory status is ongoing. Cryptocurrencies have unique characteristics and their holding and use in transactions cannot therefore be directly compared to any other form of investment activity or payment mechanism.

HMRC understands that cryptocurrencies generally operate via a peer to peer network, independent of any central authority or bank. All functions such as issue (creation), transaction processing and verification are managed collectively by this network. Transactions in cryptocurrencies are recorded in a shared public database called a ‘block-chain’. A new block can only be added to the chain when the answer to a complex cryptographic algorithm is solved. Participants in this activity are often known as ‘miners’.

Uses of cryptocurrencies

Cryptocurrencies were originally used as an alternative to centrally controlled currencies. The cryptocurrencies can be used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by one or more cryptocurrencies.

More sophisticated investors were involved in the buying and selling of cryptocurrencies to realise short-term profits or gains. This led to the creation of exchange facilities for parties to trade their cryptocurrencies into other cryptocurrencies or into recognised national currencies such as sterling or US Dollars. The increasing acceptance and liquidity of cryptocurrencies has meant that they may also be held as a longer-term investment.

Other uses of cryptocurrencies have been considered such as using them as tokens issued as consideration for investment in a business. This process is known as an ‘Initial Coin Offering’ or ICO. Factors such as the number of tokens initially available and their price may be determined by the offeror (often a company) in advance. The advent of ICOs has also led to the creation of facilities to make ICOs easier to operate.

Depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not normally taxable and gambling losses cannot normally be offset against other taxable profits (CG12602).

It is also possible that the profits of a transaction of cryptocurrency will be charged to Income Tax or Corporation Tax. TCGA92/S37 and TCGA92/S39 will apply as normal in those circumstances (CG14300P).

HMRC will continue to monitor the current and developing uses of cryptocurrencies and the block-chain technology that underpins them. Guidance may need to be amended to reflect these developments or changes in the regulatory environment in which cryptocurrencies operate.

As cryptocurrencies are not recognised national currencies, transactions in which they function as consideration given or received are ‘barter transactions’. There is guidance on barter transactions at CG78310: this guidance is written in terms of non-sterling currency but is applicable to cryptocurrencies.

Cryptocurrency as an asset

Each cryptocurrency operates according to a pre-defined and collectively agreed set of rules. As such each case will need to be considered on the basis of its own individual facts and circumstances. The relevant legislation and case law will be applied to determine the correct tax treatment.

Cryptocurrencies are intangible so in order to be an asset for TCGA purposes a cryptocurrency will need to have the following characteristics:

  • it must be something which is capable of being owned and
  • its value must be capable of being realised.

For further guidance on these characteristics see CG12010.

Where the nature of the cryptocurrency means they are dealt in without identifying the particular unit of currency being sold then they should be pooled as per TCGA92/S104(3)(ii) (CG11820). If TCGA92/S104(3)(ii) applies then the holder of the cryptocurrency will have a single pooled asset for Capital Gains Tax purposes that will increase or decrease with each acquisition, part disposal or disposal.

Acquisition cost of cryptocurrencies

The ordinary rules at TCGA92/S38 apply to cryptocurrencies (CG15150P). It is particularly important to consider whether any expenditure that has been incurred is on the asset (CG15161).

In some cryptocurrencies a new unit of that cryptocurrency is produced when a new block is attached to the block-chain.  Expenditure incurred to create and add a block to a block-chain may not be expenditure incurred on the cryptocurrency that is produced at the same time. Each cryptocurrency will need to be considered on the basis of its own individual facts and applying the relevant legislation and case law.

Sometimes there is a disagreement about the rules that should govern an existing cryptocurrency leading to a split and the creation of one or more new cryptocurrencies. The acquisition cost of the new cryptocurrency will depend on how the new cryptocurrency is distributed. Where each holder of the ‘old’ cryptocurrency is given an equivalent amount of the ‘new’ cryptocurrency then TCGA92/S43 may apply to apportion an appropriate amount of the acquisition cost of the ‘old’ cryptocurrency to the ‘new’ cryptocurrencies that the person acquires (CG15230).