Tax wedge: what are the tax implications of holding cryptocurrency?
QUESTION: I have invested in stocks and stocks for many years and am familiar with how gains and losses are treated for tax purposes in the UK. I am considering investing in cryptocurrency both potentially through mining and acquiring cryptocurrency for future resale. Are the tax implications the same for cryptocurrencies as they are for stocks and shares?
REPLY: The most important difference between cryptocurrencies and real money or money is that HMRC views cryptocurrencies as an asset and not as a currency for tax purposes.
Cryptocurrency tokens are awarded to people who verify transactions, which is called mining. Mining activity is akin to a business and therefore the value of tokens received by the miner is taxed as income in the hands of the miner, either as miscellaneous income or as commercial income if the miner business model suggests that he is engaged in a trade. In any case, the income is either charged to income tax if it is made by a natural person, or to corporation tax if it is made by a company.
Conversely, an investor who acquires a cryptocurrency and holds it for a period of time before selling it, making a profit or a loss is more likely to be engaged in an investment activity and any profit will be charged against tax. on capital gains.
The HMRC uses the same rules for cryptocurrency as it does for equity investors, in that cryptocurrency acquisitions are grouped together for identification purposes, which helps identify tokens that are disposed of when there are many acquisitions of tokens over a period of time.
When tokens are assigned, the assignments are matched as follows.
• First of all, investors are deemed to have the tokens acquired on the same day;
• Second, investors are deemed to dispose of all tokens acquired within the next 30 days; and
• What remains are tokens called the section 104 pool, in which any remaining acquired tokens are placed in a pool with an average acquisition cost calculated to calculate profit per token on disposal.
Likewise, for stocks where multiple types of cryptocurrency are purchased (e.g. Bitcoin, Ethereum, etc.) they must all be grouped separately and cannot all be put into one pool. This follows the same rules as the pooling of shares and listed shares.
It should be noted that someone who mines cryptocurrency is charged income tax as stated above based on the value of tokens received for mining activity. If the person then immediately sells those tokens for the same value, there will be no profit or capital gain.
However, if they hold the tokens for a period of time and then dispose of them, then they will either suffer a capital loss or a capital gain as above.
Paddy Harty ([email protected]) is Senior Tax Director at PKF-FPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question being asked. Neither the Irish News nor the contributors accept any responsibility for any direct or indirect loss resulting from reliance on responses.