The nature of cryptoassets means that many investors execute frequent purchases and sales. Whether these transactions constitute “investing” or “trading” is important in determining their treatment for UK tax purposes.
Why should I care?
If you buy and sell an asset as an investment (eg shares, securities or cryptoassets), any profit or loss that you realise on a sale is usually within the scope of capital gains tax (CGT). The top rate of CGT (for most assets) is currently 20%. Given the global economic climate, the markets – in particular the crypto markets – are experiencing increasing volatility. Any loss you make when selling an investment (including a cryptoasset) will be an allowable loss for CGT purposes which can be deducted from other chargeable gains.
In contrast, if you are “trading” in particular assets then any profits or losses are broadly within the scope of income tax (top rate of currently 45%). “Trading” for these purposes is a tax concept, meaning that you are operating a trade; or, putting it another way, you are operating a business of buying and selling particular assets.
Whether or not you are operating a trade is determined by reference to several “badges of trade”, which have been developed in UK tax law over many years.
What are the "badges" of trade?
The badges of trade that will tend to indicate a trading activity for tax purposes include the following:
- high volume and frequency of transactions, with sophisticated processes
- existence of similar trading transactions or interests (ie transactions which are similar to those of an existing established trade)
- source of finance (ie the source of finance may indicate an intention to buy and sell an asset quickly as part of a trade)
- timing of purchases and sales. Assets bought and sold quickly are more likely to be part of a trade, whereas buying and holding for longer periods may indicate an investment activity
- method of acquisition. Assets acquired by inheritance or gift are less likely to be the subject of a trade.
This is not a comprehensive list, and the existence or absence of one badge is unlikely, on its own, to determine if there is a trading activity.
How will my crypto transactions be treated?
HMRC states in its formal guidance that only in exceptional circumstances would it expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. This indicates that in most cases HMRC's starting point would be that the cryptoasset transaction would generate a capital gain, taxed as the lower 20% rate. However, whether this is true for any individual depends on a number of factors, including how many badges of trade the activities exhibit.
If you would like to discuss your crypto transactions with a member of our Private Client team, please get in touch. Our award-winning international private client team can advise on all tax aspects of your crypto investments, as well as ownership structures, disputes and estate planning.
This publication is not intended to constitute legal advice.
