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HMRC guidance on cryptoassets means that tax return due next month should show all profits

HMRC guidance on cryptoassets means that tax return due next month should show all profits

HMRC guidance on cryptoassets means that all 2017/18 profits should be shown on the tax return and tax paid at the end of next month

HMRC have issued updated guidance, and presumably this means that they expect 2017/18 returns to be submitted on this basis, and capital gains tax liabilities to be paid on this basis on 31st January 2019. This tax is due even where one currency was exchanged for another in 2017/18 and the currency acquired has fallen dramatically in value, so the individual may not have cash proceeds to meet the tax. Crypto losses in 2018/9 cannot be set against the gains to reduce the tax payable.

The most significant statement in the new guidance is “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”. Their previous guidance said “Therefore, 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 taxable and gambling losses cannot be offset against other taxable profits.” This had led some owners to believe that they did not need to report gains.

The new guidance makes it clear that most gains are subject to capital gains tax, and “only in exceptional circumstances” will a gain be subject to income tax. Both gains and income need to be reported, and there is no de minimis. This then means that losses will be capital losses, and so in particular, losses realised in 2018/19 may be difficult to use, as they can only be carried forward against gains in later tax years or offset against gains on other assets in 2018/19.

The guidance repeats HMRC’s previous comment in the Capital Gains Manual that gains on cryptocurrencies should be calculated on a “pooling” basis. Owners may not agree with HMRC’s comment that this “allows for simpler Capital Gains Tax calculations”. It requires that all transactions in one currency are calculated by pooling all of the acquisition costs, and then each sale or gift of currency is treated as a part-disposal of the pool. In particular, this means that owners who held a currency at 6th April 2017 will need to calculate the pool for earlier years in order to complete their 2017/18 return. Online “Crypto calculators” may well not use this method and thus cannot be used for UK returns.

There is a section on record keeping as follows.
“Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.
The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include:
• the type of cryptoasset
• date of the transaction
• if they were bought or sold
• number of units
• value of the transaction in pound sterling
• cumulative total of the investment units held
• bank statements and wallet addresses, if needed for an enquiry or review”

“Value of the transaction in pound sterling” may be a difficult calculation. HMRC say “If the transaction does not have a pound sterling value (for example if bitcoin is exchanged for ripple) an appropriate exchange rate must be established in order to convert the transaction to pound sterling.

Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. They should also keep records of the valuation methodology.”

The key point here is that capital gains tax is due even where one cryptocurrency has been exchanged for another, and the owner has received no cash.
On normal rules, where a gain is taxed on the basis of the value of the new currency, there is no deduction in this calculation for the further transaction costs that could be incurred in actually receiving this value into a UK bank account.