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FCA have confirmed that Cryptocurency CFD firms must register with FCA to operate in UK.
FCA confirmed that CFD is a regulated activity therefore all firms offering cryptocurrency derivatives in UK to be regulated.
Cryptocurrencies are not currently regulated by the FCA provided they are not part of other regulated products or services. Cryptocurrency derivatives are, however, “capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II), although we do not consider cryptocurrencies to be currencies or commodities for regulatory purposes under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations”
It is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO), will require authorisation by the FCA. This includes:
- cryptocurrency futures – a derivative contract in which each party agrees to exchange cryptocurrency at a future date and at a price agreed by both parties
- cryptocurrency contracts for differences (CFDs) – a cash-settled derivative contract in which the parties to the contract seek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value of the cryptocurrency CFD contract at its outset and at its termination
- cryptocurrency options – a contract which grants the beneficial the right to acquire or dispose of cryptocurrencies
Tax Treatment of CFD in UK can be classified under following 3 options.
- Trading activities
- Miscellaneous activities
- Trading Activities therefore taxed under income Tax
HMRC policy paper of Cryptoassest dated 19/12/2018. Confirms that, the question of whether Cryptoasset activities amount to trading is a question of fact and should be assessed in the same way as disposals of shares, securities and other financial products by reference to “Badges of Trade”.
On that basis, whether activities could be determined as “Trade” or “Investment” will depend on number of badges of trade associated with particular transactions. Policy paper further indicates that, buying and selling of Cryptoasset will normally amount to investment activities , and only” exceptional circumstances” would it expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistications that the activities amount to a trade.
So it is not clear for individuals investing in derivatives , the badges of trade which may be present may not sufficiently compelling to constitute “exceptional circumstances” which would overturn HMRC starting point that cryptoassets amount to investment activities.
If the activities amount to trade, then Income tax will be applicable. However if it’s deemed to be (non-trade) investment , then it is either considered under Capital gain tax or as Miscellaneous income
The HMRC manual sets out the tax position for futures( which include CFD’s) under CG56100
“Retail contracts for differences are financial futures, and, unless the profits are taxable as trading income, in almost every case TCGA92/S143 charges the outcomes under the capital gains regime (CG56000+). SP03/02 gives guidance on when profits or losses are to be regarded as trading income”
CG56004 confirms that the legislation at section TCGA1992/143 (1) and ITTOIA05/S779 was introduced to ensure most transactions ( if not trading ) are treated as Capital rather than Miscellaneous Income. It further clarify, that;
- commodity and financial futures dealt in on a recognised futures exchange, Section 143(2), see CG56021. See CG56120 for a list of recognised futures exchanges,
- over-the-counter futures as defined in Section 143(3), see CG56027.
Non Trade-regulated CFD
So if the cryptocurrency CFD provider is authorised by FCA to perform regulated activates in UK, and the activities amount to non-trade, then the proceed will be taxed under Capital Tax
Non-Trade-un regulated CFD
If the cryptocurrency CFD provider is not authorised by FCA to perform regulated activates in UK, and If the activities amount to non-trade, then the proceed will be taxed as Miscellaneous income – under Income Tax .
Financial trading in cryptoassets
HMRC taxes cryptoassets based on what the person holding it does. If the holder is conducting a trade then Income Tax will be applied to their trading profits.
Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business.
So if your activities deem to be trade, in this case the investment proceed also will be considered under Income tax rules , where as if the activities deem to be non-trade then it will be treated as Miscellaneous income under Income Tax.