Cryptocurrencies have rapidly gained popularity, with the most common including Bitcoin, Ethereum, and Ripple. Managing cryptocurrency investments as a British entrepreneur requires being conversant with all tax regulations on cryptocurrencies. This article highlights VAT guidelines that cover cryptocurrency investments in the UK.
Cryptocurrencies and Tax
Cryptocurrencies are digital assets built on blockchain networks. These virtual assets were developed to offer decentralisation, basically independence from centralised authorities. In the crypto world, users can buy and sell cryptocurrencies or engage in crypto trading without any intermediaries.
Investors are also open to crypto assets beyond the usual cryptocurrencies, like the newly approved Bitcoin and Ethereum exchange-traded funds (ETFs) available on stock exchanges.
Cryptocurrency is largely a mainstream movement, prompting regulatory authorities to establish guidelines to oversee the crypto financial market. In a bid to regulate crypto assets in the UK, the Crypto Assets Taskforce Committee brought together the HM Treasury (HMT), the Financial Conduct Authority (the FCA) and the Bank of England (the BoE) to outline the UK’s approach to regulating crypto assets.
His Majesty’s Revenue and Customs (HMRC) set tax guidelines on investments and using financial assets, including cryptocurrencies. HMRC applies income tax rules to cryptocurrency activity regarded as trading activity. When cryptocurrencies are regarded as investments rather than trade, the HMRC treats them as a foreign currency. Accordingly, crypto investments are charged for Capital Gains Tax (CGT). So if you buy or sell any cryptocurrency, any gain you realise after you’ve converted the purchase and sale prices to pounds/sterling exchange is subject to CGT.
VAT Guidelines on Cryptocurrency Investments
British entrepreneurs who work with cryptocurrencies in business are mandated to pay VAT on all goods and services offered. VAT is placed on any goods or services sold in exchange for crypto asset exchange tokens. The value of the goods and services is usually calculated in pound sterling, so the crypto value of the exchange tokens at the point the transaction was executed is converted to fiat value.
Crypto miners engaged in bitcoin mining or other cryptocurrency mining are excluded from paying VAT. This exception was made considering it does not constitute an economic activity for VAT purposes, nor is there a customer for the mining service. Additionally, VAT does not apply to the supply of tokens for exchanging goods and services. So when you exchange Bitcoin for pounds or any other fiat currencies, no VAT will be due on the value of the Bitcoin.
Taxation on Business
The HMRC has outlined guidelines for cryptocurrency transactions by companies, sole traders, partnerships and other businesses.
HMRC does not consider crypto assets legal tender, so corporation tax legislation does not apply to these virtual assets. However, if a business buys or sells crypto tokens as a trade, the receipts and expenses of all relevant transactions will be used to calculate the trading gains for corporate tax purposes.
As a British entrepreneur, taking a cryptocurrency loan exempts one from typical rules that apply to business loans, as cryptocurrencies are not considered money. Similarly, usual rules that bind creditor-debtor relationships do not apply.
While cryptocurrencies are not viewed as legal tender, trading them for profit subjects such transactions as a disposal of capital assets. Disposal of capital assets requires that any gains made be charged with a capital gains tax.
While the HMRC has limited guidance on VAT associated with crypto, the tax authority’s position is provisional and subject to EU VAT rules and crypto asset regulation changes. Currently, British entrepreneurs are required to pay VAT on any goods and services bought using crypto assets. There isn’t clarity on specific crypto assets like non-fungible tokens (NFTs) and real-world assets (RWAs), a class of crypto tokens representing tangible assets like fiat currencies, gold, and real estate.
If you pay your employees remuneration in crypto assets, income tax and national insurance contributions will be due on the value of the crypto assets. This value, for the purpose of tax, is based on the value of crypto assets against fiat currency.
Finally, stamp duty and stamp duty reserve tax are not liable for transfer or crypto tokens. And if the transfer of exchange tokens is not considered to be a land transaction, stamp duty land tax will not apply. However, if the crypto tokens are given as a land transaction, the virtual assets would fall within the definition of “money or money’s worth” and would be chargeable to stamp duty land tax.
Specific VAT Guidelines for Cryptocurrency-Related Activities in the UK
Here are specific VAT guidelines on unique aspects of crypto services:
- The HMRC charges VAT on tokens or crypto coins sold during an initial coin offering (ICO).
- Crypto exchanges must pay VAT on the value of the trading fees charged for swapping cryptocurrencies.
- Companies operating crypto wallets and related payment services are also mandated to pay VAT on the value of all fees charged for wallet and payment services.
The Importance of VAT Compliance for Crypto Investors
Managing cryptocurrency investments in the UK without a sufficient understanding of relevant tax guidelines can place you at a disadvantage in terms of tax compliance. VAT applies primarily to goods and services purchased using crypto assets. Other VAT guidelines apply for various scenarios, from paying employees in crypto and running a Bitcoin mining business to launching an ICO.
read more : What is the current VAT rate in UK?
