CRYPTO41300 – Cryptoassets for Business: Corporation Tax: Eligible Costs – HMRC Internal Handbook
When a person calculates their gains/losses from the disposal of tokens, not all costs are deductible.
Section 38 of the Taxation of Taxable Gains Act of 1992 (TCGA) provides the types of costs which may be deducted. HMRC’s view is that these include:
- the consideration (in pounds sterling) originally paid for the asset
- transaction fee paid to have the transaction included in the distributed ledger
- advertisement for a buyer or seller
- professional fees to establish a contract for the acquisition or sale of tokens
- the costs of performing a valuation or allocation to be able to calculate gains or losses
Any costs deducted from profits for income tax, see CG10260, are not eligible as a deduction for capital gains tax.
Exchange fee
It is common for people to use an exchange to transact as explained at CRYPTO10250. Some fees charged by exchanges are allowed, but not all. Below is a list of common fees charged by exchanges and whether they satisfy Section 38 TCGA 1992:
| Situation in which exchange costs may be incurred | Treatment of charges for Section 38 TCGA 1992 |
|---|---|
| Exchange (swap) the pound sterling for a fiat currency other than the pound sterling | Section 38(1)(a) – eligible as cost of acquiring fiduciary currency other than sterling |
| Exchange (swap) fiat currency other than sterling for sterling | Section 38(1)(c) – deductible as incidental cost of disposal of fiat currency other than sterling |
| Deposit British Pound with an Exchange | Sterling is not an asset for CGT purposes, therefore not an eligible cost |
| Deposit fiat currency other than sterling at a currency exchange | The depositor retains beneficial ownership of fiat currency other than sterling, so there is no acquisition or disposal to which costs can be attributed |
| Use British Pound to Buy Tokens | Section 38(1)(a) – eligible as acquisition cost of tokens |
| Use fiat currency other than sterling to buy tokens | Section 38(1)(a) – eligible as acquisition cost of tokens |
| Exchange (swap) token A for token B | See below |
| Eliminate tokens for the British pound | Section 38(1)(c) – allowable as an ancillary cost of token disposal |
| Have tokens for a fiat currency other than sterling | Section 38(1)(c) – allowable as an ancillary cost of token disposal |
| Withdraw the British pound from the exchange | Sterling is not an asset for CGT purposes, therefore not an eligible cost |
| Withdraw fiat currency other than sterling from the exchange | The reprocessor retains beneficial ownership of fiat currency other than sterling, so there is no acquisition or disposal whose costs can be allocated. |
Exchange (swap) token A against token B: the commission paid relates to the entire transaction, i.e. for the sale of an asset and the acquisition of another asset. This means that the charges are attributable to both assets. HMRC’s view is that these costs would be deductible in calculating the disposal of token A under section 38(1)(c), and would be deductible in calculating the eventual disposal of token A. B under section 38(1)(a). TCGA92/S52(1) specifies that an amount can only be deducted once in the calculation of an assignment.
Where a qualifying cost relates to more than one asset, the cost must be allocated among those assets on a fair and reasonable basis (TCGA92/S52(4)). You can agree that the equal allocation of this type of expense between the assets given up and the assets acquired (ie a 50/50 split) is fair and reasonable in the circumstances. If the client chooses to apply a different approach, this can be considered on a case-by-case basis.
Mining
Costs of mining activities (e.g. equipment and electricity) are not considered eligible costs with respect to tokens, as they are not entirely and exclusively intended to acquire the tokens, and do not therefore may not meet the requirements of Section 38(1)(a) TCGA 1992. It may be possible to deduct some of these costs from profits for income tax or corporation tax purposes. Costs incurred to acquire equipment used for mining may be deductible upon disposal of such equipment subject to relevant provisions such as movable property exemption and wasted asset exemption.
If mining amounts to trading for tax purposes, the tokens will initially be part of the trading stock. If these tokens are transferred out of the trading stock, the company will be treated as if it had purchased them at the value used in the trading accounts. Companies must use this value as an allowable cost in calculations when disposing of tokens. More information can be found in CG69220.
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