HMRC has published its views on the tax treatment of individuals acquiring, mining, dealing in and selling cryptoassets. The policy paper does not introduce a new tax system for cryptoassets but tries to fit new technology into the existing law.
Although many refer to some cryptoassets, such as Bitcoin, Ether or Litecoin as "cryptocurrencies", what is clear is that HMRC does not consider that they should be treated in the same way as currencies such as Sterling, Euros or the Dollar. Whilst an individual may buy foreign currency for a holiday and sell any surplus at a profit on their return, that is not the case with cryptocurrencies - any gain made on selling cryptocurrencies will be taxable.
Whilst individuals may expect to pay tax when they sell investments in cryptocurrencies, they may not have realised that simply using cryptocurrency to purchase a product or service may trigger a capital gain. As far as HMRC is concerned, any use of cryptocurrency is treated as a disposal of the relevant cryptoassest and, if the value has increased, the increase is a capital gain.
HMRC provides some helpful guidance that will be welcome to taxpayers. As with dealing in shares, the threshold for an individual buying and selling cryptoassets to be treated as a trader is high so it is only in exceptional circumstances that an individual will be subject to income tax on any gains made. Therefore, even if use of cryptocurrencies to purchase products or services may trigger a capital gain, this is likely, in most cases, to be covered by the individual's annual allowance - unless there have been other capital gains during the year. In a falling cryptocurrency market, any losses can be used or carried forward against other capital gains - however, the "bed and breakfast" rules apply in the same way as they do to shares, to prevent cryptocurrencies being sold and immediately repurchased in order to trigger a loss.
The policy paper also makes interesting reading in relation to HMRC's views on mining and airdrops.
What the policy paper shows is that HMRC is happy to use 20th century legislation to deal with a 21st century phenomenon - for how this will continue remains to be seen.