After Satoshi Nakamoto introduced Bitcoin as a “peer-to-peer electronic cash system,” the term "cryptocurrency" became more popular.
“The following article does not constitute tax advice or financial advice and is solely the opinion of the writer based on publicly available information. Readers are encouraged to consult their tax consultants/experts for matters relating to any form of taxation”
After Satoshi Nakamoto introduced Bitcoin as a “peer-to-peer electronic cash system,” the term "cryptocurrency" became more popular. Today, there are over 7,000 digital currencies spread across multiple blockchains. But as retail and institutional investors started trading and profiting off these digital assets, there was an increased discussion over crypto taxation.
There is a vast amount of crypto projects, each with its own proposals and goals. Every cryptocurrency has a set of characteristics that are related to its blockchain network, issuance methods, and technical standards. Such characteristics determine how each crypto operates and whether it can be regarded as a form of “money”.
This is where it gets tricky. Due to these differences, the central authorities have been struggling with rolling out a standardized tax treatment for cryptocurrencies. Currently, there are some regulations and laws in place, but they mostly focus on Bitcoin and similar cryptocurrencies, which function as a transferable asset carrying value.
The United Kingdom and European Classification of Cryptocurrencies
The United Kingdom has been cautious in recognizing cryptocurrencies, although it has refrained from banning them. After leaving the EU on 31 December 2020, the country negotiated a Trade and Cooperation Agreement with the EU and has since adopted a “wait and see” strategy regarding cryptocurrencies.
The European Central Bank was among the first to issue a legal definition of cryptocurrencies in 2012 and subsequently updated it in 2015. According to its latest guidelines, Bitcoin and other similar cryptocurrencies are defined as: “virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money” – purposefully omitting words such as “digital money” or “unregulated.”
What Is a Cryptocurrency?
Cryptocurrencies are a digital form of money that is protected by cryptography. While speculation is a big part of it, there are many use cases that make Bitcoin and other cryptocurrencies valuable.
There are different types of cryptocurrencies: stablecoins, utility tokens, and security tokens. The value of stablecoins is pegged to a real-world asset or fiat currency, such as GBP, EUR, or the US dollar. Security tokens and stablecoins usually fall under the jurisdiction of most countries, while utility tokens are typically not regulated unless they are defined as e-money.
Despite this general definition of what cryptocurrencies are and what you can do with them, countries differ in whether they recognize them as money or equivalent to fiat currency. As a result, some countries tax them while others do not.
Tax on Crypto Assets
The cryptocurrency market is still in its infancy. Because of this, new regulations around the way governments tax cryptocurrencies constantly emerge. Currently, the concerns and regulations around cryptocurrencies form a colorful landscape in Europe and the United Kingdom.
Taxation is based on general principles and the individual guidance of Tax Authorities. Naturally, some countries are stricter than others in the way they govern and tax cryptocurrencies. Below we take a closer look at different countries to give a comprehensive picture of each jurisdiction.
HMRC and United Kingdom Crypto Taxation
Her Majesty's Revenue and Customs (HMRC) is among the first authorities in the EU to introduce clear guidance on cryptocurrency taxation back in 2014. Under the legal definitions of cryptocurrencies, coins such as Bitcoin and Ethereum are classified as exchange tokens. There are no specific regulations for them currently, but they fall under anti-money laundering regulations.
When it comes to earning income, in whatever manner, from any venture or asset, including Bitcoin or other cryptocurrencies, the HRMC has marked the following as subject to taxation:
Other service providers
Mining income is not subject to value-added tax (VAT), but loss and gains from holding and selling cryptocurrencies are treated just as gains made in other commodities or currencies. Businesses and shops should pay VAT when they sell services and goods for crypto in the United Kingdom.
Interestingly, individuals who purchase and store cryptocurrencies for “personal use” (such as long term investment and holding) and not for speculation, won't have their assets taxed.
The Netherlands makes a distinction between an individual buying and selling cryptocurrency and a business. For business entities and people operating on their behalf, any gains from crypto are taxable as business income. In this case, losses are allowable. Earnings from mining cryptocurrencies fall in the same category.
Taxation on crypto held as a private asset depends on the gains from a "source of income" as defined by legislation. In some instances, they are taxed as income from savings and investments. The rate for taxation is flat based on a weighted notional yield on net assets.
If a company makes gains from selling or mining cryptocurrency, this will be subject to corporate income tax.
Similar to the United Kingdom, the exchange of cryptocurrency for foreign currencies is exempt from VAT.
In Spain, holding cryptocurrency as an investment means it is subject to capital gains tax, which is applied when the cryptocurrency is handed over by the taxpayer.
Profits or losses from exchange movements between cryptocurrencies and other currencies are taxable for all companies. However, the income derived from crypto mining is and associated expenses are deductible.
All transactions in cryptocurrency are exempt from VAT and any revenue from cryptocurrency mining is generally outside the scope of VAT.
When the crypto investment has a speculative character, private investors pay 33% plus local surcharges on their gains. If the investment is not speculative and falls outside any professional activity, gains on such investments may be exempt from tax. Losses are then not tax-deductible.
Professional investors are required to list any gains from their cryptocurrency activity as professional income. It is then subject to progressive rates from 25% to 50%, plus local taxes and social security contributions.
Companies subject to the ordinary corporation tax regime should include the profits on exchange movements between currencies in the taxable profits, and losses are deductible.
Germany is a pioneer in the cryptocurrency market, although the tax treatment of digital assets is not fully settled by law. In some instances, profits may be taxable as capital gains, current income, or exempt. Generally, cryptocurrencies are regarded as an asset for tax purposes.
The scope of taxation depends on whether the cryptocurrency is held as a private or business asset. For corporations, they are regarded as part of their business assets. In this case, all profits are subject to tax, including trade tax.
When held as a private asset, profits from lending are taxed as income. Capital gains are only subject to tax if the acquisition and sale happen within one year. In the case of prior lending, the period is ten years.
VAT and Tax on Cryptocurrencies for Individuals
The HMRC has certain principles when it comes to cryptocurrencies and VAT:
Receiving income from Bitcoin mining activities generally falls outside the scope of VAT. Because there is an insufficient link between any services provided and any consideration received, mining does not constitute an economic activity for VAT purposes.
Income from other activities, such as for the provision of services in connection with the verification of specific transactions, is exempt from VAT under Article 135(1)(d) of the EU VAT Directive. This applies even if you charge for these activities as they fall under the definition of “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and other negotiable instruments,”
If you are exchanging bitcoin for GBP or other fiat currencies, no VAT is applicable on the value of the bitcoins themselves.
As outlined above, charges in any form over and above the value of the Bitcoin for arranging or carrying out any transactions in bitcoin are exempt from VAT, under Article 135(1)(d).
Except for the above scenarios, VAT is applied the normal way on the transactions of suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrencies.
Cryptocurrency Laws in the United Kingdom and the EU
The prospects of the crypto industry in the United Kingdom remain vague or, at least, less defined compared to other countries in Europe. Retail investors seem to be safe, but businesses that want to accept cryptocurrency payments are stifled by the clear action from authorities.
Meanwhile, many EU countries are adopting a crypto-focused approach and introducing regulations to clarify how cryptocurrency companies should operate under their jurisdiction. Some countries like Malta, Belarus, and Portugal have gone as far as creating crypto havens. They don't tax digital assets unless you're a day trader. In this case, you will have to pay a business income tax.
Cryptocurrencies are officially legal in Belarus, and all gains received from operations with digital currencies are exempt from taxes. In Portugal, traders don't have to declare any of the profits obtained by crypto trading or investing.
At the same time, the European Commission is taking active steps towards defining the crypto space. The 5th Anti-Money Laundering and Counter-Terrorist Financing Directive, known as "5AMLD", came into effect 10 January 2020. The focus of this legislation was on ensuring global security, the integrity of the financial system, and sustainable growth. As such, its regulatory perimeter expanded to include crypto and involved entities with new definitions of "virtual currency" and "virtual asset service providers" (or VASPs).
Under 5AMLD, cryptocurrency businesses are "obliged entities", similar to traditional financial institutions. As such, crypto companies have to adhere to the same AML/CFT (Anti-Money Laundering/ Combating the Financing of Terrorism), KYC (know-your-customer), and data-sharing requirements as banks and fintech companies.
This is one of the major steps taken in the direction of legalizing cryptocurrencies in Europe. Some countries still express stronger opinions about regulating these digital assets. Others are less keen on fast-tracking cryptocurrency adoption, citing concerns regarding money laundering, terrorist financing, dramatic volatility, and investor protection.
As with every new asset, the process of standardization and mass adoption is likely to undergo various stages before we can see specific cryptocurrency regulations.
“While The Bank of England does not consider crypto assets to "pose a risk to monetary or financial stability in the United Kingdom ", its guidelines clearly state that "anyone buying crypto-assets should be prepared to lose all their money. Any type of trading and speculation in financial products that can produce a high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future. Anyone considering investing in cryptocurrencies should be well informed about these high-risk assets.” quotes from CNBC.