If you acquire cryptoassets for the purpose of disposing of them you need to pay income tax on any profit you make. For example, if you buy or mine cryptoassets to sell or exchange them. If you make a loss when you sell your cryptoassets you may be able to claim this loss.
Why your purpose matters
If your purpose for getting cryptoassets is to sell or exchange them, you’ll need to pay income tax when you do.
You may have more than one purpose for your cryptoassets at the time you acquire them. It is your main purpose that matters.
We look at your purpose at the time you acquire (for example, buy or mine) your cryptoassets. If that purpose changes later on, it does not matter.
If you plan on selling or exchanging your cryptoassets at some point in the future, then you have a purpose of disposal. It does not matter how long you plan to hold onto your cryptoassets for before selling or exchanging them. Your main purpose can still be to sell or exchange them, even if it takes a few years.
What you say your purpose is
What you say your purpose for getting cryptoassets is must be supported by what you actually do and the surrounding circumstances, including the:
- nature of the asset (for example, does it provide an income stream or any other benefits while being held)
- circumstances of the purchase
- number of similar transactions
- length of time you hold the asset
- circumstances of the use and disposal of the asset.
Just saying why you got your cryptoassets is not enough. For example, you might say you got your cryptoassets as:
- a long-term investment
- a hedge against inflation
- portfolio diversification
- a store of value outside the monetary system.
These types of reasons usually still involve a purpose of eventually selling or exchanging your cryptoassets. There will be a purpose of disposal if sale or exchange is the way to achieve your goals.
Income streams from your cryptoassets
Sometimes you might earn an income from holding cryptoassets. For example, you might stake your cryptoassets or use a staking-as-a-service provider to earn more cryptoassets. Having an income stream is a factor to consider when thinking about your purpose.
When you do not have an income stream
You may have cryptoassets that do not provide an income stream or any other benefits while you hold them.
This strongly suggests you acquired them for the purpose of selling or exchanging them. This is because the only benefit you get is when you sell or exchange those cryptoassets.
This is similar to our position on gold bullion.
QB 17/08: Are proceeds from the sale of gold bullion income?
When you have an income stream
You may have cryptoassets that provide an income stream or other benefits while you hold them (for example, from staking).
Just because there is an income stream does not mean that you did not acquire them for the main purpose of selling or exchanging them.
If you sell or exchange your cryptoassets for a profit and claim that you did not acquire them for the purpose of selling or exchanging them, you will need clear and compelling evidence to support your claim.
What to do next
If you acquired your cryptoassets for the purpose of disposal you need to work out your tax to pay or loss to claim. To claim a loss, you need to show that if you'd made a profit it would have been taxable.
You may still need to pay income tax even if you did not acquire your cryptoassets for the main purpose of disposing of them, such as if you’re carrying on a profit-making scheme.
Sione heard about crypto B in late 2016 and decided to invest $2,000. Shortly afterwards as he saw the price going up, he invested an additional $3,000.
In late 2017 Sione sold his crypto B when he judged that the market had reached its peak.
Sione acquired crypto B for the purpose of disposal. His actions show he bought it to make a gain on sale. Crypto B did not provide Sione with an income stream or any other benefits. Sione will need to pay tax on his profits.
In June 2018 Sione decided to buy more crypto B. In December 2018, after a steep drop in the price, Sione decided to sell crypto B to minimise his losses.
Sione’s history of buying and selling crypto B, and the nature of crypto B, support the fact that Sione held crypto B for the purpose of disposal. In the same way Sione had to pay tax on his profits, Sione can claim a loss made on the sale of crypto B.
Leena decided to invest $5,000 in crypto E as a long-term investment. She held it for 3 years during which time the market for crypto E went up and down. After 3 years when Leena judged that crypto E had realised its full potential, she sold it for a profit.
Crypto E did not provide an income stream or any other benefit to Leena. She simply held it with a purpose of one day making a gain on the sale. Calling it a long-term investment does not mean that Leena did not acquire crypto E for the purpose of disposal.
On the facts provided Leena acquired crypto E for the purpose of disposal and needs to pay tax on the profit she made from selling it.
Chen bought crypto B as a speculative investment intending to sell it for a profit when the price went up.
Six months later an exchange he used offered users an opportunity to lend crypto B to the exchange and earn rewards (interest). Chen did this and received a small amount of reward income paid in crypto B. Two months later he sold all his crypto B for a profit.
It is Chen’s purpose at the time he acquired crypto B that matters. The fact that he decided to use his cryptoasset for lending does not change the fact that his purpose when he bought crypto B was to sell it.
Chen needs to pay tax on the reward income he received as well as on the profit he made from selling his crypto B. The reward income can be income for Chen twice. The reward income is taxable when it is received. Any profit made when it is sold is also income. To calculate the profit on the sale, the cost is the income amount when the reward was received.
How you can prove what your purpose is
If you expect that you are likely to earn more money from selling your cryptoassets than from any passive income you might receive, your dominant purpose will most likely be acquiring cryptoassets for disposal.
If your dominant purpose is not to dispose of the cryptoassets, you will need to be able to show this. There are several factors to consider when working out what your dominant purpose is. The types of factors that will be considered include:
- what you say your purpose was at the time you acquired the cryptoassets
- the type of cryptoassets you bought. For example, why did you choose the particular cryptoassets and how easy is it to derive passive income from them
- what research did you do before you purchased your cryptoassets. For example, did you:
- do an analysis of the potential passive income you expect to receive compared to gains on sale
- forecast a potential return from holding the cryptoassets
- review your holdings and passive income return.
- what is your return from passive income compared to your gains on disposal
- how long did you hold your cryptoassets for, compared to how long you used your cryptoassets for passive income
how many purchases and sales were you making,when you did sell your cryptoassets and what were the reasons for this.
Pete heard about crypto C which could be staked to earn passive income on a centralised exchange while it was owned. After doing a couple of hours of research on the internet, Pete found that the staking process was easy as the exchange did everything for him, and he could earn up to 8% per year. It was much higher than what he could get from leaving his money in a term deposit at the bank. Pete also found out that crypto C had gained in value by 150% over the last year. Pete thought that staking was a good way to increase his earnings until he could time the market and sell his crypto C when prices were at a high.
Pete invested $5,000 into crypto C. He kept his crypto C staked for $250 worth of crypto C in staking rewards. At that time, the price of crypto C had increased to a point where Pete felt it had reached its peak. Pete sold all his crypto C (including the staking rewards) for $12,500.
Pete purchased crypto C for the dominant purpose of disposal. While he wanted to earn staking rewards, he also planned to sell crypto C when the price was at its peak. That was his dominant purpose, as shown by his actions.
Pete is required to pay tax on the receipt of the staking rewards and also on the profit from selling all his crypto C, including sales of the rewards. Pete will be able to deduct the initial cost of his crypto C, including the value of the staking rewards that Pete initially paid tax on.
Selina has been involved in buying, staking and selling cryptoassets for a few years and had made some good profits (and the occasional large loss). Selina was researching how to stabilise her portfolio to try and earn a steady income stream without worrying too much about another market crash. Her research led her to crypto U, a stablecoin that paid a decent passive income return of 12% when staked on a particular platform. Crypto U was pegged to the $USD so she would be protected from some of the heavy losses that she previously suffered.
Selina did some calculations and looked up crypto U’s price history, as well as considering the returns from other similar stablecoins. Selina wished to create a stable return that she could use to buy more cryptoassets without having to sell any of her initial investment and without worrying about volatility.
Selina purchased $20,000 of crypto U and earned $3,600 from staking it over three years continuously. Selina had to sell all her crypto U to pay an unexpected bill. She sold the initial crypto U and the rewards for $24,000.
Selina had acquired crypto U to earn steady passive income. She was required to include the passive income in her tax return when she earned it and also when she disposed of it (as she had intended to use the staking rewards to buy more cryptoassets). However, as Selina purchased the initial crypto U for the dominant purpose of earning passive income, she did not have to include the profit that related to that initial crypto U in her tax return.