UK companies increasingly use cryptocurrencies in one way or another; a few accept Bitcoin as payment for goods or services; some invest in Bitcoin, Ether, and other exchange tokens; and of course there are many companies that have been set up specifically to undertake mining.
If your company carries out activities involving exchange tokens, it will be liable to pay tax on those activities. All sorts of activities are within the scope of taxation, including:
- Buying and selling exchange tokens
- Exchanging tokens for other assets (including cryptoassets)
- Selling goods or services in return for tokens
Most of the taxes we touched upon in previous blogs about cryptoassets may be relevant; in addition, companies have to consider Corporation Tax, which is charged on profits and chargeable gains realised by companies - including those arising from their cryptoasset activities.
Whereas individuals pay Income Tax, National Insurance or Capital Gains Tax on profits and gains arising from cryptocurrency dealings, companies pay Corporation Tax on such activities instead. The rate of corporation tax is currently 19% on all profits and gains, but a new, higher rate of 25% is set to be introduced from April 2023.
Calculating taxable profits
When calculating your company’s Corporation Tax liability, you have to take into account all exchange token transactions the company has carried out.
Your company’s cryptocurrency transactions may be taxed under different sets of rules, depending on the type of activities being undertaken:
- As profits from a trade
- Under rules relating to “miscellaneous income”
- Under rules relating to “loan relationships” (rarely)
- Under rules relating to “intangible fixed assets” (rarely)
- Under rules concerning chargeable gains
In most scenarios we are concerned mainly with the first, second and last bullet points; they operate broadly in order of precedent, so activities not taxed as trading profits may instead be taxed under the miscellaneous income rules; and transactions not taxed under either of those regimes may instead be taxed as chargeable gains (or allowable losses) arising from the disposal of a chargeable asset.
In the UK companies normally report their taxable profits in pounds sterling, however exchange tokens can be traded on exchanges that don’t use pounds sterling; transactions that do not have a pounds sterling value must be converted into pounds sterling using an appropriate exchange rate. HMRC says that “reasonable care needs to be taken to arrive at an appropriate valuation for the transaction using a consistent methodology”. Your company should keep a record of the methodology you have used.
If your company accepts tokens as payment for the goods or services it provides, the tokens will need to be included as income when you calculate the company’s taxable profits, again converted to a pounds sterling value using an appropriate exchange rate.
Accounts for UK companies should be drawn up in accordance with “Generally Accepted Accounting Practice” (either UK or International Accounting Standards should be followed).