WEN Tax & How Does It Work?
By our amazing BiaDAO Barrister and Tax Specialist — Wat Tyler
BiaDAO is a DeFi investment & cryptocurrency mining protocol based on the MINE token backed by the BiaDAO treasury.
In today’s blogpost, we’re diving in and giving you a quick and hopefully simple, strategic overview of UK tax and more specifically, how it relates to those among you who have crypto coins and fungible tokens as part of your investment portfolio.
Cryptocurrency Law — A Snapshot!
While cryptocurrency is a developing area of law, it’s not one that you should get too bogged down in (yet). Instead, the short to mid-term focus should be on how to “manage” your assets. In this respect, it’s actually no different than any other financial transaction you might already have made, involving property or shares that form part of your portfolio.
The purpose of this blogpost is to highlight and explain the implications of holding the asset as an investment, which is usually the default position.
Keep an eye out as later on we’ll dive in deeper and take a look at physically trading transactions. For now we’re covering off crypto coins and other fungible tokens.
So first things first! What is a fungible token?
It’s an odd term! When we refer to an NFT we are broadly talking about coins like Bitcoin, Ethereum or, Elon’s favourite, DogeCoin.
To most people, one fungible item is interchangeable with another so it’s best to not get too hooked up on their names.
Fungible items exist for the most part in the financial world.
Let’s take Tesla as an example.
I might own 100 shares in Tesla. When I acquired these shares I wasn’t really bothered which 100 shares I acquired, just that I had them.
Now I’ve decided that I want to sell 50 of these shares off. Again, I’m not really concerned which 50 out of my 100 are sold, just that I want to sell them!
For Capital Gains Tax purposes, shares are generally added to a pool for this very reason.
Bitcoin and other cryptocurrencies are also fungible assets in the same way.
Are the activities of an investment nature?
‘Investment’ will be the default position for someone buying and selling crypto. When activities are of a more highly organised nature, you might then class them as “trades”.
When activities are considered as investments any profits or losses on disposals will fall within the capital gains regime. See below HMRC’s current guidance on this, in place since 2014:
Transactions will not be considered “so highly speculative that it is not taxable…”
The mind boggles as to why HMRC ever thought this way! Cryptocurrency is not currently considered a real currency and as such, it’s not within the rules that apply to foreign currency gains. If you want to move to a country that treats bitcoin as legal tender, you should look up flights to El Salvador!
What constitutes a disposal?
A “disposal” or sale can be triggered in a couple of ways within the crypto space:
· Swapping one crypto to another (eg Ethereum (“ETH”) for Solana)
· Sale for fiat currency such as GBP:
· A gift of coins: say from a parent’s wallet to a child
· As a medium of exchange: for example, using Bitcoin to purchase a pint at your favourite crypto savvy watering hole!
Capital Gains Tax pooling
Pooling makes things easier. It stops us having to try and identify which fungible item was bought or sold. Instead they’re placed in separate ‘pools’. So an investor might have a separate pool for their Ethereum, Bitcoin and Dogecoin. The result is that when assets from the pool are sold, a simple average purchase cost can be used to calculate its gain.
Exceptions to the ‘pooling’ rule
· ‘same day rule’ (TCGA 1992, s105); or
· 30-day bead and breakfasting rule (TCGA 1992, s106A) applies.
There can be quite significant costs of transacting on centralised (Coinbase, Binance etc) and decentralised exchanges (PancakeSwap, Uniswap etc).
For example, transactions in ETH will likely incur ‘gas fees’ as a cost of doing business.
Common fees include:
1. The fees for swapping GBP (or other fiat) for crypto
2. The fees for swapping crypto for GBP (or other fiat)
3. The fees to swap one crypto for another
These costs can be used and offset upon asset disposal for taxable purposes.
You can ‘stake’ crypto on an exchange and earn rewards. Normally, this is the form of acquiring more tokens. The receipt of staking rewards is likely to be treated as miscellaneous income.
Generally, there is no tax due on the airdrop — however, the airdropped assets will need to be added to a new or existing pool for CGT purposes.
It is a fair rule of thumb that if you have to pay tax on the gains resulting from certain activities then the same should be said for allowing the losses.
A capital loss may be:
· Offset v current year gains; or
· Carried forward indefinitely
Lost wallets, rug-pulls and scams
We regularly hear about the unfortunate James Howells. He believes his lost digital wallet, containing 7,500 bitcoin (valued at over £200m), currently resides somewhere within Newport City landfill site. It is perhaps of little comfort to Mr Howells that he could potentially make a negligible value claim, offsetting this loss against other gains if he can show that he is unable to recover it.
A rug-pull is a crypto ‘term of art’ and describes a scenario where a crypto project ‘pumps’ in price and attracts investors “drunk” on the fear of missing out.
However, once the price has spiked, those connected with the project and ‘in the know’ dump their tokens leaving the price to crash. Everyone else is left holding worthless tokens. In this instance, you’d definitely have a case for declaring a capital loss however, that’s little solace for the victim of something that’s turned out to be nothing more than an elaborate scam!
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