Financial watchdogs in the United Kingdom are asking the public for their opinion on how to properly tax crypto-assets. The Financial Conduct Authority (FCA) has released guidance on cryptoassets, and open consultation will be open until April.
The goal of the guidance is to provide clarity to investors and regular citizens that choose to buy Bitcoin and other digital assets.
The guidance applies to:
- Creating crypto-assets
- Issuing crypto-assets
- Buying and selling crypto-assets
- Investment managers
- Investment exchanges
Anyone dealing in crypto-assets will be able to use the guidance to better understand regulatory concerns for cryptocurrencies and related assets.
Policy Paper Information on Crypto-assets for Individuals
HM Revenue and Customs has released a policy paper that attempts to work on clarifying crypto-asset taxation. The paper outlines the new form of asset, and this is considered a “cryptocurrency.”
What’s important is that these assets are not considered:
Instead, these assets fall into three different types or categorizations:
- Exchange tokens
- Security tokens
- Utility tokens
But taxation on these tokens will not be dependent on the definition of the token. Instead, taxation will depend on the nature of use of the token.
Utility and security tokens are not really considered in the paper, but exchange tokens are. The exchange tokens will be tokens that people are most accustomed to seeing, and this will include Bitcoin, Ethereum and other popular tokens that are exchanged online.
Exchange tokens are meant to be used as payment, and capital appreciation of the asset will be applied as tax.
Income tax may take precedence over capital appreciation tax.
When does a crypto-asset become an asset that is subjected to income tax?
- Trading in the crypto-asset took place. The taxed value will be assessed to the trading profits.
- Mining of an asset. There are several factors used to determine if mining will result in taxation, including the level of mining, risk, organization and commerciality of the mining.
- Fees or rewards that have been granted as a result of mining will be subject to income tax.
- Airdrops will also have the asset taxed as income tax.
Capital gains tax will be assessed in circumstances where the asset is being purchased or sold. This activity will be considered investment activity, which is subject to capital gains tax.
Capital gains or losses may be assessed on the disposal of the asset, or when the asset is:
- Sold for money
- Used to pay for goods
- Used to pay for services
- Exchanged for a different asset
- Given away to another person
As a taxable asset, this also means that there are allowable costs that can be deducted to determine if there has been a gain or loss in the cost of the asset. These allowable costs may include:
- Price originally paid for the asset
- Transaction fees that have bene paid
- Advertising for the purchase of the asset
- Professional costs
Mining activities will not be allowed to be applied to the costs. If you have traded in digital currencies or are beginning to trade in Bitcoin, it’s important to understand how these policies and proposals will impact your taxes.