Digital currencies are rapidly evolving, and the question of “how to tax cryptoassets” is increasingly being asked by governments across the world.
In recent years, cryptoassets, particularly cryptocurrencies, have garnered significant interest due to their potential to revolutionise financial transactions.
However, this innovation brings forth complex challenges for taxation authorities, some of which the Institute of Chartered Accountants of England and Wales (ICAEW) have been looking at in their recent guidance published for the Government.
Similarly, the upcoming developments related to the Organisation for Economic Co-operation and Development’s (OECD) Cryptoasset Reporting Framework (CARF) are worth examining in more depth to get a better understanding of upcoming taxation law changes.
Tackling the taxonomy of cryptoasset taxation
Cryptoassets are digital assets that use cryptography for security and operate on a blockchain, a type of distributed ledger technology.
They can broadly categorise into three types:
- Exchange tokens (like Bitcoin)
- Utility tokens (like Filecoin)
- And security tokens (like Blockchain Capital (BCAP))
Each serves different purposes, from acting as a medium of exchange to granting access to specific services or representing ownership of assets.
The issue with taxing these assets is that they are 1) decentralised by nature, 2) transactions are anonymous, and 3) the underlying technology is constantly changing.
Governments are having a hard time regulating them as a result.
ICAEW’s TAXguides on cryptocurrency taxation and the OECD’s recent consultation
The UK does not have specific tax legislation for cryptoassets and instead relies on the existing tax laws.
Individuals disposing of cryptoassets may, therefore, be subject to Capital Gains Tax if they realise a gain.
For businesses, profits from cryptoasset trading activities are liable to Corporation Tax.
Additionally, mining and staking activities present unique tax considerations that haven’t been efficiently addressed by the Government, highlighting the complexity of taxing this new asset class.
The ICAEW has been a key player in the attempt to clarify the UK’s tax obligations regarding cryptoassets.
It has published two TAXguides offering invaluable insights for both individuals and businesses.
For individuals, the guides cover the disposal of cryptoassets, differentiating between capital gains and income based on the nature of the activity (investment vs trading), and address the taxation of employment income received in cryptoassets.
For businesses, they discuss the tax treatment of trading profits, losses, and the VAT implications of transactions involving cryptoassets.
Additionally, they tackle complex issues such as the tax consequences of hard forks and airdrops, providing clarity on when these events might result in taxable income or capital gains.
Further complicating the taxation landscape, the OECD’s introduction of the CARF proposes a new paradigm for the automatic exchange of information for tax purposes concerning transactions in cryptoassets.
The UK Government’s consultation on how to implement the CARF underscores a commitment to enhancing transparency and tax compliance.
This consultation, open until 29 May 2024, is a critical step towards adapting the UK’s tax system to the realities of the digital age.
What does the future hold for cryptoasset taxation?
The integration of the CARF and the outcomes of the Government’s consultation could significantly alter the UK’s approach to cryptoasset taxation.
This might introduce new regulations tailored to the unique characteristics of cryptoassets, aligning with international standards and enhancing compliance mechanisms.
Such developments necessitate active engagement from all stakeholders in the cryptoasset ecosystem to ensure that forthcoming regulations are both effective and equitable.
If you own cryptoassets you may need to reassess your current tax strategies keeping the possible changes in mind.
