A new policy paper explains how HMRC will tax transactions involving cryptoasset exchange tokens that are undertaken by companies and other businesses (including sole traders and partnerships). It does not apply to the issue of tokens under initial coin offerings or other similar events.
Although HMRC recognises other types of cryptoasset, this paper deals specifically with the tax treatment of exchange tokens (for example, bitcoin). The tax treatment of security tokens and utility tokens will be addressed in future guidance.
If a company or business is carrying out activities which involve exchange tokens, they are liable to pay tax on them.
Such activities include:
- buying and selling exchange tokens
- exchanging tokens for other assets (including other types of cryptoassets)
- providing goods or services in return for exchange tokens
The type of tax will depend on who is involved in the business and the activities it carries out (including whether these count as a trade).
It is likely they will be liable to pay one or more of the following:
- Capital Gains Tax
- Corporation Tax
- Income Tax
- National Insurance contributions
- Stamp Taxes
The amount of tax a business must pay will depend on its income, expenditure, profits and gains. These must be declared annually to HMRC on either:
- Self Assessment tax return (for sole traders and partnerships)
- Company Tax Return (for companies)
HMRC will consider each case on the basis of its own facts and circumstances. It will apply the relevant legislation and case law to determine the correct tax treatment (including where relevant, the contractual terms regulating the exchange tokens).
If a company disposes of exchange tokens to charity, they will not have to pay Corporation Tax on any gain that has accrued. This does not apply if either:
- they make a ‘tainted donation’
- the company disposes of the tokens to the charity for more than the acquisition cost (so that they realise a gain)
US guidance from the IRS
The Internal Revenue Service (IRS) has issued guidance for donors (and charities) on the FAQ page of its website.
The IRS addressed whether gifting virtual currency to a charity could result in income, gain, or loss. The IRS confirmed that if you donate virtual currency to a charitable organization, you will not recognize income, gain, or loss from the donation. That’s the same result as giving stock or other appreciated assets, which are also characterized as capital assets.
The IRS also explained how to calculate the value of a gift of virtual currency to a charity. It’s fairly simple: your charitable contribution deduction is generally equal to the fair market value of the virtual currency at the time of the donation. That’s only true, however, if you have held the virtual currency for more than one year. If you have kept the virtual currency for one year or less, your deduction is the less of your basis (cost plus adjustments) in the virtual currency or its fair market value at the time of the contribution.
What about the charity’s reporting requirements to the IRS? A charitable organization that receives virtual currency should treat the donation as a non-cash contribution. Those are reported on a Form 990-series annual return. Also, charities must file Form 8282, Donee Information Return, if they sell, exchange or otherwise dispose of charitable deduction property – and that includes the sale of virtual currency for real currency – within three years after the date they initially received the property. The donor also gets a copy of the form.