Summary
On 20 December 2019 HMRC updated its guidance on the taxation of cryptoassets. In particular, HMRC has now given its view on where the most common form of cryptoasset (being the exchange token) should be treated as located for UK tax purposes. Here, we examine HMRC’s updated guidance and its impact on individuals currently holding cryptoassets.
What has HMRC said?
In its updated guidance, HMRC provides that “throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK”. HMRC implies that all cryptoassets that “are intended to be used as a method of payment” should be treated as exchange tokens. This would therefore include the most common forms of cryptocurrencies, such as Bitcoin, Ethereum and Litecoin.
HMRC considers that the above rule will apply for both capital gains tax (CGT) and inheritance tax (IHT) purposes, and that using the residency of the beneficial owner to determine location “gives a clear, logical, predictable and objective rule which can be easily applied".
If an exchange token is co-owned between two or more beneficial owners, HMRC considers that each beneficial owner's interest in the asset will be where that beneficial owner is resident. If one or more of the co-owners are UK resident, this will not affect the location for those co-owners who are not UK resident.
Prior to the update on 20 December 2019, HMRC last updated its guidance on the taxation of cryptoassets in December 2018.
What impact does this have for owners of cryptoassets?
If HMRC’s view is correct, then UK resident non-UK domiciled individuals will not be able to use the remittance basis of taxation for capital gains realised in respect of exchange tokens.
As a result, UK resident individuals (whether UK or non-UK domiciled) will be subject to CGT on an arising basis on any capital gains realised on the disposal of exchange tokens. In contrast, any gains realised on non-UK situs assets by a remittance basis user will only be subject to tax in the UK if the individual remits any part of the sale proceeds to the UK.
In addition, from an IHT perspective, if an individual is UK resident then any exchange tokens they own directly will be within the scope of IHT. This is because UK situs assets are within the scope of IHT whether the owner is UK or non-UK domiciled.
This could lead to potentially harsh results. For example, a non-UK domiciled and not deemed domiciled individual who became UK resident and then died would be subject to IHT on the value of their exchange tokens, even if the individual were only temporarily resident in the UK.
HMRC’s guidance does not appear to contemplate cryptoassets being owned by companies or trustees. However, if one applies the same test as for individuals, exchange tokens held by non-UK resident companies and non-UK resident trustees will presumably be treated by HMRC as located outside of the UK for tax purposes.
What next?
It should be remembered that HMRC’s guidance represents HMRC’s view of the law, rather than the law itself. If an individual were subject to a significant tax charge on the basis of the guidance, HMRC’s interpretation may well be litigated (subject to any intervening legislation giving effect to HMRC’s interpretation).
In this regard, it is also worth remembering that under general law there is no existing class of asset whose location for tax purposes is determined by the residence of the beneficial owner, and in this sense HMRC’s view of the location of exchange tokens is certainly novel.
An alternative approach could be to treat exchange tokens as located where the relevant private key is located (i.e. the key that enables the token to be transferred by the owner to another crypto account, or wallet). If the private key were held personally (e.g. on a smartphone or on a piece of paper), the location of the private key could dictate the location of the asset for tax purposes. If the private key were held by an exchange (such as Kraken or Coinbase), the location of the exchange’s business, or its country of incorporation, could be used.
HMRC acknowledges in its guidance that cryptoassets are “fast-moving and developing all the time”, and that its expressed view on the location of exchange tokens “most accurately fits the majority of transactions… at this stage in the development of these tokens”. As a result, we can expect plenty more commentary and guidance, and perhaps legislation, as the cryptoasset industry develops and the tax exposures become more significant and commonplace.
In any event, for now, investors in cryptoassets would be well advised to consider their potential tax exposure in light of HMRC’s guidance, and the potential tax treatment of previous transactions in cryptoassets.
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