Cryptocurrency and NFT in the UK: laws and taxation

Cryptocurrency and NFTs in the UK: Laws and Taxation - Legal Advice

According to HMRC, cryptoassets (also known as "tokens" or "cryptocurrency") are cryptographically secured digital representations of value or contractual rights that can be: transferred, stored , trade electronically.

While all cryptoassets use some form of distributed ledger technology (DLT), not all DLT applications involve cryptoassets.

HMRC defines the main types of cryptoassets:

Exchange tokens are used for trading on cryptocurrency exchanges and are becoming increasingly popular as investments due to their potential value growth. The most famous examples include bitcoin, ether, litecoin and others.

Utility tokens are used to access specific products or services on the DLT platform. They are usually issued by a company or group of companies that commit to accepting these tokens as payment for their goods or services. Also, service tokens can be traded on exchanges or used in peer-to-peer transactions, just like exchange tokens.

Product tokens (Security tokens) grant their holders certain rights or interests in a business, such as ownership, the return of a certain amount of money, or a share in future profits.

Stablecoins aim to reduce volatility as they can be tied to assets that are considered stable in value, such as fiat currencies (such as US dollars) or precious metals such as gold.

The tax treatment for all types of tokens depends on their nature and use, not their definition.

HMRC does not recognize crypto-assets as currency or money.

The possession and use of crypto-assets itself is not illegal in the UK and does not involve tax evasion or any other illegal activity.

Crypto-asset taxation for individuals

In most cases, cryptoassets are treated as investments for tax purposes. This means that profits from the sale of cryptoassets are subject to capital gains tax, and losses can be used to offset other capital gains.

In rare cases, an individual may be considered to be engaged in financial trading of crypto-assets. In this case, income from the sale of crypto-assets will be subject to personal income tax.

Capital Gains Tax (CGT)

Crypto-assets are usually held by individuals as personal investments, usually for profit or to make purchases.

Non-traders will be subject to Capital Gains Tax (CGT) on profits made from the sale of cryptocurrencies. If any amount has been taxed as income when received (for example, as a result of mining or as employment income), then the previously taxed amount will become the base value of the asset for these purposes. CGT on the sale of crypto-assets will be from 10% to 20%, depending on the total income of the individual.

Capital gains for cryptocurrencies of the same type must be calculated following the "mixing" rules using normal valuation methods. Separate pools are required for each cryptocurrency. It is also important to understand that the realization of cryptocurrency occurs not only when it is exchanged for cash, but also when it is used to buy other cryptocurrencies.

Income tax

Individuals will pay income tax on profits from the sale of crypto-assets if these transactions are classified as "trading".

Determining whether an individual is “trading” in cryptoassets is complex and based on a number of factors, including the source of funding, frequency of transactions, method of acquisition, and interval between the purchase and sale of the asset. Similar to stock trading, the threshold for recognizing an activity as trading is quite high — transactions must be significant in terms of frequency, organization and complexity.

Ultimately, this is a question of fact and will depend on the specific circumstances of each case. In practice, it is unlikely that HMRC will recognize an individual's activity as trading in crypto-assets.

Cryptocurrencies obtained through mining or staking (both methods of obtaining new cryptocurrencies through the verification of transactions on the blockchain) are taxed as income that can be attributed to trading activities or other income, as the case may be.

The personal income tax rate ranges from 20% to 45%, depending on total income.

There is a common misunderstanding that cryptocurrencies are taxed like gambling winnings, which supposedly means no taxation on gains and no benefits for taking losses. This position was based on previous HMRC guidance, but HMRC has now updated its guidance, confirming that for tax purposes transactions involving cryptocurrencies do not constitute gambling or speculative transactions.

Crypto-asset taxation for legal entities

The company is required to pay taxes on its activities related to exchange tokens, in particular:

• When buying and selling exchange tokens
• When exchanging tokens for other assets, including other types of cryptoassets
• When mining
• When providing goods or services in exchange for exchange tokens

Taxation of cryptocurrency transactions considered as investments

If a company or corporate partner owns exchange tokens as an investment, it must pay corporate tax on the profit received from the sale of tokens.

In the event of receiving capital losses from the sale of exchange tokens, these losses can be used to reduce the total profit from the sale of the property. However, there are special rules for accounting for losses when exchange tokens are transferred to a "related party".

Getting legal help with cryptocurrency taxation in the UK

Getting legal help with cryptocurrency taxation in the UK is essential to getting your taxes right and avoiding legal issues. Legal professionals can advise on the classification of crypto-assets, determine tax liabilities, including capital gains tax or income tax, and assist with transaction accounting and loss compensation. They can also clarify the rules for legal entities and ensure compliance with current tax requirements to avoid fines and legal consequences for misdeclaring cryptocurrency income. Legal analysis of the situation, legal audit, legal audit of the situation, legal audit, legal audit of the situation.