HMRC Approach
Key areas that HMRC will explore when considering if an individual is a financial trader are set out below:
  • Experience - the experience of the person carrying on the activity, particularly if that person is, or ever has been, regulated by the Financial Conduct Authority (FCA) or its predecessor the Financial Services Authority (FSA).
  • Reason for commencement - the reason for commencing the activity, particularly if the person had little or no previous experience.
  • Funding - how the activity was funded initially.
  • Registered with HMRC - whether any steps were taken to notify the commencement of a trade as a business for Income Tax and National Insurance purposes.
  • Commerciality - how precisely the activity is carried out and whether this is done in a commercial way. If appropriate, identify all the steps in each type of transaction.
  • Profit-making strategy - review business plan if drawn up. If one was not prepared on the basis that third-parties were not involved, you would still expect the person to have some idea of how they proposed to make a profit. How realistic was that plan? What arrangements were put in place to review the performance of the activity and, if such a review was carried out, what changes, if any, were implemented? Was a limit placed on the amount of losses that would be tolerated
  • Loss-limiting strategy - whether a strategy was put in place to limit losses. This might be a โ€˜stop-lossโ€™, which effectively caps losses at a certain level, or a hedging strategy in case the market moves against expectations.
  • Type of cryptoassets - the type of cryptoassets bought and sold. The ease (or lack of) with which the items can be bought and sold may be relevant to the overall decision.
  • Wide/narrow range of cryptoassets - whether the person deals in a wide range of cryptoassets. A person who buys only particular cryptoassets, or operates in a narrow area of the market, may be using experience but may also be exposed to greater risk of adverse market movements which a regulated dealer would be able to limit. It might even cause the person to cease dealing for a time in contrast to a regulated dealer who seeks to make money from any market situation (see BIM56820).
  • Acumen - whether the person actually uses any specific acumen and experience in the transactions carried out. It may be relevant in this connection whether the person uses an โ€˜execution onlyโ€™ service from the Exchange (where the Exchange simply carries out the clientโ€™s instructions), or whether more detailed financial advice is received commensurate with operating a portfolio of investments. If use is made of any โ€˜robotโ€™ program, what influence does the person have on how the program operates?
  • Research - what research does the person undertake prior to carrying out any transactions? For example, does he act on a tip from the financial pages of a newspaper, or has he access to expensive real-time information services? Does he undertake a thorough examination of the cryptoassets he might contemplate buying? Remember that only by carrying out actual transactions can any research, however extensive, bring the person profits, so compare the stated research with the number and frequency of transactions.
  • Number/frequency of transactions - the number and frequency of transactions will be considered, even though BIM56840 confirms these are not determinative of trading in shares (and therefore cryptoassets).
  • Holding term - the length of time for which cryptoassets are held. Are they bought and sold within minutes, or retained for some months or even longer? Be aware that, in some cases, transactions may be rolled over on a number of occasions, so they appear to be held long-term, but are in fact conceptually different from a long-term investment.
  • Time spent - the time devoted to the activity. Consider how the personโ€™s other commitments are likely to affect the amount of time available to devote to dealing.
  • Prior trading activity - compare and contrast the activity with any dealing in cryptoassets prior to the date on which trading is said to commence. There is a discussion at BIM56930 on whether particular activities amount to a separate trade or are bound up with an existing investment activity. Identify the grounds for which the person asserts that the activity now amounts to a trade.
  • Provision of service to others - whether a service is provided to third parties.
  • Records - the extent of the records kept or provided by Exchanges. Where transactions are carried out on a margin there will be specific documentation in relation to this between the Exchange and the individual.
  • Fiscal motive - whether there is any fiscal motive for undertaking particular transactions.
  • Hobby motive - whether there is any non-trading motive for carrying on the activity, such as a hobby interest.
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