Since the creation of Bitcoin in 2009, the popularity of cryptoassets has rocketed.
Research published by the Financial Conduct Authority in 2021 concluded that around 2.3mn people in the UK own cryptoassets, up from 1.9mn in the previous year.
More recently, crytoassets have been recognised as a credible alternative investment and form of payment. There has also been increasing interest in non-fungible tokens (or NFTs), which are a form of cryptoasset utilising blockchain technology.
The relative ease with which such assets can now be acquired, and the interest generated by the potential for profit from holding such assets, has contributed to the interest of HM Revenue & Customs and tax authorities around the world in taxing gains from the sale of them.
While it may have initially been considered an opaque form of investment, HMRC now has specific powers that it has exercised in recent months to obtain information from UK cryptoasset exchanges about their customers.
HMRC is tasked with reducing the tax gap due to tax evasion in this area. It will do this by using its sophisticated data mining software to identify when individuals have omitted to declare tax liabilities.
Towards the end of 2021, HMRC launched a campaign encouraging taxpayers to consider their affairs in case they had any cryptoasset gains to declare. These letters are often referred to as nudge letters.
From a UK tax perspective, there was a time when such investments were regarded as gambling, and any gains realised from the sale of such assets would not be taxable. This was, in fact, never the case.
To clarify the position, new guidance was published by HMRC that confirms how HMRC will treat gains made on the sale of cryptoassets.
The basic position HMRC takes is that most cases involving the sale of cryptoassets are considered investments and any gains realised by UK residents will be subject to capital gains tax.
This also applies when one type of cryptoasset is exchanged for another. There is anecdotal evidence that people mistakenly believed that as the assets were merely exchanged there was not a disposal for tax purposes.
In this scenario, the sale of the cryptoasset is treated as a disposal of an asset for ‘normal’ currency such as sterling.
For example, if an individual owns dogecoin (a type of cryptoasset popularised by Elon Musk) and exchanges this for bitcoin (the ubiquitous cryptoasset) this is treated as the sale of the dogecoin for money.
The individual in this situation must work out whether a gain or loss has been realised at the point of exchange based on the difference between the original acquisition cost of the dogecoin deducted from the value of the bitcoin at the time of exchange.