Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.
Anyone who holds cryptoassets needs to consider if they are engaged in financial trading in cryptoassets, rather than simply assuming they are taxed under the capital gains tax regime (as an investor).
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 gains. Therefore, being classified as a trader rather than investor usually results in a higher tax bill. Fortunately, HMRC has stated that the classification of cryptoasset users as traders is “likely be unusual”.
Consideration of whether or not an individual is engaged in financial trading is a very complex area. It is not as simple as working through the ‘Badges of Trade’ as these have been demonstrated to have limitations in the field of financial trading.
The relevant considerations have been detailed in the Appendix to Recap’s UK crypto tax guide, which explores the approach HMRC would take to gather the facts of the case and summarises relevant case law on the topic.
The tax position regarding individuals trading and investing in CFD’s (Contract for Difference), Futures and margin trading is very unclear as there is no HMRC guidance specific to cryptoassets.
Assuming the individual is not treated as a financial trader, it is not clear if the gains or losses are to be taxed under the capital gains regime or be treated as miscellaneous income.
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