As cryptocurrencies are slowly but surely clawing their way from their niche sector into the mainstream, it inevitably forces regulators to respond. While some countries’ governments were happy to fully embrace cryptocurrencies, others have shown incredible reluctance towards the whole matter.
In the case of the UK, this situation is not exactly clear, as the United Kingdom’s approach to cryptocurrency regulations is somewhat restrained. Weirdly enough, the UK has no specific cryptocurrency laws. However, cryptocurrencies are still not considered legal tender as the regulatory bodies are fully aware of their unique identity. In short, it means that cryptocurrencies can’t really be compared to conventional currencies, investments, or payment options, making the whole taxing process somewhat of a struggle.
In this guide, we will cover the most important aspects of the UK crypto regulations in order to help you understand British crypto rules. For starters, we will look at the regulatory bodies in the UK.
Currently, there are three British regulator bodies that have the potential to impact the crypto industry the most.
HM Revenue &Customs
First off, there’s the HMRC, short for HM Revenue & Customs. This is Britain’s tax department that works with the Treasury ministry and is responsible for maintaining and implementing tax policies.
Financial Conduct Authority
The FCA, or Financial Conduct Authority, is charged with overlooking most financial services within the country. To date, the FCA oversees more than 58,000 businesses including financial companies, fintech companies, payment institutions, as well as all sorts of consumer credit companies.
Bank of England
The BoE, or Bank of England, is the country’s most important bank. It’s the institution responsible for ensuring the stability of the country’s financial system. It’s also the institution that regulates all the country’s banks, issues money, and basically sets all the monetary policies within the country.
CATF and cryptoassets
The CATF or Cryptoasset Taskforce is a special institution specifically designed to deal with the whole cryptocurrency situation in the UK. It was announced in March, 2018 by the Chancellor of the Exchequer, as part of the UK government’s FinTech Sector Strategy. It includes the HM Treasury, the Financial Conduct Authority, and the Bank of England. In short, all of the regulatory bodies mentioned above.
Because the CATF does not consider cryptoassets to be currency or money, the regulatory body has identified three types of cryptoassets, such as exchange tokens, utility tokens, and security tokens.
According to the CATF, the exchange tokens are intended to be used as a method of payment. Most cryptocurrencies currently available fall into this category including popular ones, such as Bitcoin and Ethereum.
Utility tokens are defined as the sort of asset that provides the holder with access to a particular service on any platform using a distributed ledger.
Security tokens are the ones that provide the holder with specific interests in a business or service.
UK cryptocurrency taxing
Buying with crypto
All merchants who accept crypto must pay taxes. The VAT, or Value Added Tax, applies whenever crypto is used to buy goods and services. Interestingly, the seller of the goods or services is the one responsible for collecting the VAT.
Mining crypto and network fees
All crypto miners, both independent and those that take part in a pool, must pay income taxes on their activities. These taxes apply for the coins earned when adding blocks to the blockchain as well as to network fees earned for bundling each transaction into the blocks. The law specifies that miners who hold onto their coins may be required to pay capital tax when they decide to sell the coins.
Airdrops and hard forks
The tax system does not overlook airdrops. However, this situation is a bit of a “grey area.” Tokens earned in exchange for services, like promoting an ICO, are considered income and are subjected to tax. Capital gains taxes could apply when the tokens are sold.
Conversely, tokens received in a hard fork are not considered income and are not subjected to taxation. This means that income tax is not always applied to airdropped cryptoassets (especially ones received in a personal capacity). Income tax does not apply when tokens are received without doing anything in return, or when they are part of a trade or business involving cryptoassets or mining.
Airdrops that are provided in return for a service, are subjected to income tax either as miscellaneous income or as receipts of an existing trade.
Crypto capital gains tax
Anyone looking to renounce on his or her cryptocurrency tokens is subjected to capital gains taxes. According to HMRC, the following disposal methods result in a capital gain: selling crypto for fiat, exchanging one crypto for another, using crypto to buy goods or services, as well as offering (donating, gifting) crypto to somebody else.
The future of crypto laws in the UK
Regulating a complex industry as that of cryptocurrencies is not an easy task. Sometime in 2018, Mark Carney, the Governor of the Bank of England, revealed that cryptocurrencies will most likely to be fully regulated.
In a recent speech, the Governor declared that “the time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges but with them great responsibilities.”
The FCA is working with the BoE and the UK Treasury departments to develop a comprehensive strategy for dealing with cryptocurrency risks.
The British regulators had been for a long time a very laid-back approach to cryptocurrencies, as they used to represent such as small niche. However, now that cryptocurrencies are a lot more mainstream, the widespread adoption has forced UK regulators to act. There’s still a long way to go until the crypto situation will be a clear one in Britain.