Govt mulls tax change to crypto activities

Cryptoassets would only be subject to capital gains tax when they are sold or exchanged, under new rules proposed by the government.

Currently, cryptoassets are taxed when sold, exchanged for a different type of cryptoasset, used to pay for goods and services and when given away to another person.

In a consultation, published yesterday (April 27), the government said in certain situations the current tax rules can lead to transactions treated as disposals even though the effective economic ownership of the assets is retained.

The new rules proposed mean that if owners sell their rights in a token to another party, for instance in a “stake” (where the ownership of cryptoassets is temporarily lent to another party to support the blockchain network, which can result in rewards), they would not be subject to capital gains tax.

The new rules would get rid of the current setup, whereby crypto owners are subject to a tax liability where they have not benefited from a gain that can be used to meet the liability.

“The need to determine and record the market value of assets at each step in the transaction may also give rise to a disproportionate administrative burden,” the government said.

In a call for evidence last summer, the government said nearly all respondents agreed that the current tax rules in this area cause difficulty and should be changed.

Earlier this year, the government set out its proposed approach for regulating cryptoassets, which included bringing centralised crypto exchanges into financial services regulation for the first time, as well as other core activities like custody and lending. 

Crypto trading venues will be responsible for defining the requirements for admission and disclosure documents, while financial intermediaries and custodians, who are responsible for facilitating transactions and storing customer assets, will face more stringent rules.

While cryptocurrency is not currently regulated by the Financial Conduct Authority, digital asset service providers that operate in the UK must go through the regulator’s anti-money-laundering review process.

Around 85 per cent of crypto groups that attempted to obtain FCA registration have failed, leading to criticism from the industry that the UK has stifled innovation.

Under its proposals, the government plans to introduce a time limited exemption for firms currently authorised by the FCA so that they can continue to promote their services while a broader regulatory regime for crypto is introduced.

The government’s proposals are centred around a number of crypto activities, including exchange activities, custody activities and lending activities.

sally.hickey@ft.com