Crypto exchanges operating in the UK to pay 2% digital service tax

• The UK has updated Her Majesty’s Revenue and Customs regulation (HMRC) to compel exchanges to pay 2 percent Digital Service Tax. 
• The report explains that exchanges do not qualify for any exemption as digital assets are not classified under financial instruments.

The United Kingdom has this year taken a stringent stance against the operation of crypto exchanges with the Financial Conduct Authority (FCA) updating its requirements for their operation. This saw some of the crypto firms reverse their decision to register with the UK financial watchdog. The latest decision against crypto exchanges is that the UK has updated Her Majesty’s Revenue and Customs regulation (HMRC) to compel crypto exchanges to pay 2 percent Digital Service Tax. 

The regulation exempts financial marketplaces from this tax. However, the report explains that exchanges do not qualify for this exception as digital assets are not classified under financial instruments. It is further reported that Bitcoin and other cryptos do not represent money or financial contracts, and will not be exempted from any benefit enjoyed by the online financial market. 

There are a wide variety of crypto assets, each with different characteristics. It said that because cryptocurrencies do not represent commodities, financial contracts or money, it is unlikely that crypto-asset exchanges can benefit from the exemption for online financial marketplaces.

Industry key players strongly oppose the new tax imposed on crypto exchanges

The Digital Service Tax was imposed in April last year to ensure that social media platforms, online search engines, and financial marketplaces that generate more than £500 million ($667.5 million) in global digital services revenue and more than £25 million ($33.3 million) in UK digital services revenue in a 12-months accounting period pay 2 percent tax. 

The taxable revenues will include any revenue earned by the group which is connected to the social media service, search engine, or online marketplace, irrespective of how the business monetizes the service. If revenues are attributable to the business activity and another activity, the group will need to apportion the revenue to each activity on a just and reasonable basis.

It is worth noting that this tax system is likely to phase out following the G20 agreement earlier this year. Until new measures are put into place, all crypto exchanges shall be bonded by the Digital Service Tax. Last year, the UK subsidiary of Coinbase reportedly recorded a sale of EUR 21.2 ($23.9 million). Recent reports estimate that its global revenue has quadrupled, meaning it may surpass the UK revenue threshold by the end of the year.

The decision to add crypto exchanges to the Digital Service Tax adds to the UK crypto taxation laws already considered murky. As expected, the announcement has been strongly opposed by many key players in the crypto industry including Ian Taylor, Director of CryptoUK. According to him, the laws will directly affect crypto investors as tax burdens may be shifted to them by increasing fees. This means there will be a huge retrogression of the crypto space. CryptoUK also stated that it is unfair to treat cryptos differently from other financial assets.