Taxing crypto – place your bets

23 May 2023
Early in the life of cryptoassets, attempts were made to argue that it should be taxed as if it were gambling, which in the UK would mean profits were not taxable. HMRC however, along with most countries, took the view that cryptocurrencies ware a form of investment and outlined a regime to tax them accordingly. 

If the government were to rule that cryptoasset investments do in fact represent gambling, it would be inequitable and illogical to continue to tax them when other gambling activities are not. In light of the level of profits some investors are making on cryptoassets; the loss of tax revenue could be material. It could also inadvertently result in the UK becoming a tax haven for crypto investors, potentially attracting crypto investors to look at moving to the UK from overseas. Such visitors may not be welcomed with open arms as they would not be directly contributing to our tax base.

There are also wider developments, such as Bitcoin being legal tender in El Salvador, which further highlights cryptocurrency is proving challenging to regulate and tax. This development in particular raised the question of whether a cryptocurrency could benefit from tax reliefs afforded to foreign currencies in the future. The UK is not alone in wrestling with such issues with the Australian government introducing specific tax legislation last year to address the point.  

The Bank of England is itself looking at the merits of establishing a digital pound. The intention is that this would be treated as a currency similar to sterling and could be distinguished from other cryptocurrencies used for payment as it would represent a ‘central bank digital currency’ (commonly known as a CBDC). If a ‘Britcoin’ is introduced, there may be calls for other cryptocurrencies to be taxed in a similar way to traditional ‘fiat’ currencies.   

The Treasury Committee’s report highlights the apparent schism in attitudes towards cryptoassets. The government’s stated hope is to place the UK at the forefront of such new technology and establish the country as global hub for cryptoassets. However, if we treat cryptoassets as a fantasy gambling tool, this seems unlikely to give out the supportive message intended and investors may question the UK’s suitability as a destination to develop blockchain technologies. 

Cryptoasset investment is a complex and rapidly developing field and it is hard for government and regulation to keep up with this. It needs to be looked at from all angles, especially where a decision in one field endangers a useful treatment in another. If investing in cryptoassets was classified as a gambling activity, it could represent a tax tale of unintended consequences.