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.
If your employer pays you in cryptoassets, the sterling equivalent at the date of receipt is taxable employment income, subject to income tax and national insurance contributions. Depending on whether those tokens are a readily convertible asset (RCA) such as Bitcoin, or not, determines how employers must handle national insurance contributions and paying income tax on your behalf.
Cryptoassets are RCAs if trading arrangements exist, or are likely to come into existence, in accordance with section 702 of the Income Tax (Earnings and Pensions) Act 2003. Exchange tokens like Bitcoin can be exchanged on one or more token exchanges in order to obtain an amount of fiat money. On that basis, it is HMRC’s view that ‘trading arrangements’ exist, or are likely to come into existence at the point cryptoassets are received as employment income.
If an employer has a UK tax presence they must deduct and account to HMRC for the Income Tax and Class 1 National Insurance contributions due through the operation of PAYE, based on the best estimate that can reasonably be made of the cryptoasset’s value.
If an employer cannot deduct the full amount of Income Tax due from employment income, they must still account to HMRC for the balance. This is called the ‘due amount’. The employee must reimburse their employer for the ‘due amount’ within 90 days after the end of the tax year. If they do not, then a further Income Tax charge and National Insurance contributions liability will arise on the employee for an amount equal to the ‘due amount’ under section 222 ITEPA 2003.
Cryptoassets received as earnings from employment, which do not meet the definition of RCAs, are still subject to Income Tax and National Insurance contributions, but employers do not have to operate PAYE.
The individual must declare and pay HMRC the Income Tax due on any amount of employment income received in the form of cryptoassets (using the employment pages of a Self-Assessment return).
The employer should treat the payment of cryptoassets as payments in kind for National Insurance contributions purposes and pay any Class 1A National Insurance contributions to HMRC.
Cryptoassets provided by a third party in connection with employment
Where cryptoassets are provided by a third party in connection with employment, an Income Tax charge and Class 1 National Insurance contributions liability may arise. Employers must account to HMRC for the Income Tax and National Insurance contributions due through the operation of PAYE, based on the best estimate that can reasonably be made of the cryptoassets’ value.
Any disposal after receiving cryptoassets as income is subject to the capital gains regime and there may be a taxable capital gain if there has been an increase in value of the cryptoassets.
Need to sort out your crypto taxes? Use Recap, the privacy focused cryptocurrency accounting software to calculate the taxable gain or loss on your cryptocurrency investments!