As new technology like Blockchain develops at pace, it presents a challenge to UK authorities such as HMRC to keep up and try to establish guidance on how existing legislation applies to scenarios that were almost certainly not anticipated when the rules were introduced.
The rise in popularity in Bitcoin trading, in particular around its peak in late 2017, has prompted HMRC into action, albeit they only updated their guidance on the taxation of individuals in December 2018 with further guidance released in November 2019 on the taxation of crypto-businesses.
With both papers being released late in the year, there was not a lot of time for individuals to complete their returns before the 31 January deadline and any returns completed early may need to be reviewed and potentially amended.
In terms of the changes themselves, HMRC’s recent guidance confirms that cryptoassets should typically be treated as capital transactions (apart from exceptional circumstances) and therefore subject to UK capital gains tax at 20 per cent for a higher rate taxpayer. Therefore, if an individual has made losses on cryptotrades they should be able to report these on their tax return and offset the losses against any future taxable capital gains. This firmer view is to be welcomed as there was some debate on whether HMRC might not allow relief for loss making traders.
The guidance for individuals states that each cryptoasset must be placed into its own individual 'pool' and taxed in a similar manner to the way shares are taxed. This can be extremely difficult in practice and means each transaction gives rise to a taxable gain or loss (even transactions between cryptoassets). As a result, the taxable gain can be very different from the actual cash gain received at the end of the year which could trip people up.
In contrast to the UK, it appears other smaller jurisdictions are moving quickly to attract crypto businesses by establishing their own regulatory frameworks. For example, Gibraltar has actively sought to provide legal certainty regarding the trading of cryptoassets and introduced regulatory framework from 1 January 2018, meaning crypto-businesses may need to be authorised by the Gibraltar Financial Services Commission.
Such investment in providing certainty on the regulatory and reporting aspects is leading to increased enquiries from cryptoasset business owners as to whether they should relocate from the UK. It is important to note however that cutting ties with the UK is not as simple as it might seem and if UK residents plan to move their assets abroad, they need to consider any such move carefully as adverse UK tax implications can arise.