Investor or Trader?
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Anyone who buys and sells, or mines cryptoassets, or trades in cryptoasset derivatives, needs to first consider if they are engaged in financial trading in cryptoassets, rather than simply assuming they are classed as an investor and taxed under the capital gains tax regime.
Individuals who are classified as financial trading in cryptoassets are required to pay income tax and national insurance on their profits, rather than capital gains tax on their capital gains and income tax on their miscellaneous income. Therefore, being classified as a trader rather than investor usually results in a higher tax bill.
Fortunately, HMRC has stated in the Cryptoasset Manual at CRYPTO20050 that:
“In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.”
HMRC go on to say:
“As set out in CRYPTO20250 there may be cases where the individual is running a business which is carrying on a financial trade in cryptoassets and they will therefore have taxable trading profits. This is likely to be unusual, but in such cases Income Tax rules would take priority over the Capital Gains Tax rules.”
HMRC go even further than this in CRYPTO20250 where they state:
"Only in exceptional circumstances would they expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activities amount to a trade in itself.”
Considering if you are a financial trader is a very complex area. We recommend you see read our detailed guidance and consult a professional tax advisor to consider your specific circumstances.
It is not as simple as working through the ‘Badges of Trade’, as these Badges have been demonstrated to have limitations in the field of financial trading.
The question of whether cryptoasset activities amount to trading depends on a number of factors and the individual circumstances. It will ultimately be a question of fact.
Individuals buying and selling cryptoassets will often describe them as ‘trades’. However, HMRC state the use of the term ‘trade’ in this context is not sufficient to be regarded as a financial trade for tax purposes.
Key areas that HMRC will explore when considering if an individual is a financial trader are set out in detail here.
A business trading in cryptoassets would be similar in nature to a business trading in shares, securities and other financial products. Therefore further guidance can be drawn from the existing case law on trading in shares and securities as detailed here.
