Cryptoassets held by individuals: What constitutes “trading” for tax purposes
HM Revenue & Customs (“HMRC”) continues to update and expand its guidance on the taxation of cryptoassets held by individuals. In this series, we will explore various tax topics relevant to individuals buying, holding and disposing of cryptoassets. This second article in the series considers what constitutes a “trade” for tax purposes.
Disposal of Tokens – Capital Gains Tax Treatment
Broadly, UK tax resident individuals disposing of cryptoassets which are held as personal investments would be subject to capital gains tax on any gains arising.
Disposal of Tokens – Income Tax Treatment
In circumstances where individuals are treated as “trading” in cryptoassets, any gains arising on the disposal of cryptoassets would be subject to income tax (instead of capital gains tax which typically attracts a lower rate of tax). It should be noted that “trading” has a specific meaning for tax purposes.
What is Trading?
It is unlikely that an individual would be treated as “trading” for tax purposes where tokens are only occasionally bought and sold.
HMRC acknowledges in its guidance that it would treat individuals who buy and sell cryptoassets as “trading” only in “exceptional circumstances”. What amounts to “trading” activity is ultimately a question of fact and is dependent on a number of factors.
HMRC has not formulated a specific “trading” test in the context of cryptoassets. Instead, in respect of exchange tokens specifically, HMRC has confirmed in its guidance that it would regard a trade in exchange tokens to be similar in nature to a trade in shares, securities and other financial products. It follows that guidance on what constitutes “trading” can be drawn from the existing case law on trading in shares and securities.
In its Business Income Manual, HMRC states that “(a)n activity of buying and selling shares and other financial instruments undertaken by an individual will normally amount to investment or speculation falling short of trading unless there are factors which take the case ‘out of the norm’”.
The factors which the courts have previously taken into account when considering the question of what constitutes a “trade” for tax purposes include:
(a) the time spent by an individual on the activity;
(b) whether an individual entirely relies on their own expertise or uses the advice of brokers; and
(c) whether the activities undertaken are characteristic of established share dealers or not, for example, if the individual has no customers and is dependent on market movements alone to make a profit.
Much will depend on the specific facts of the case when determining if any gains arising will be taxed as a “trade”. This is an area which our Key Contacts are well placed to advise.
