Cryptocurrencies have been around for the best part of a decade, but taxing assets such as bitcoin is uncharted territory for HMRC, writes Colin Senez.
Cryptocurrency is not a new concept. In fact, the best known cryptocurrency, bitcoin, celebrated its tenth anniversary last year.
However, it was only in December 2019 that HMRC published an updated version of its guidance on crypto assets to include a section on the situs (the place to which, for legal purposes, an asset belongs) of cryptocurrency exchange tokens for UK tax purposes. As with anything new, it can take some time for the authorities to get up to speed; cryptocurrency for the uninitiated can be complex, and to the initiated it can be complex. So it is not surprising that given the relative success of cryptocurrency and its widespread use that the authorities are eager to clarify how it is taxed.
While HMRC acknowledges that assets such as bitcoin (among others) are also referred to, generally, as ‘cryptocurrencies’, it restates its view that unlike the term ‘currency’ which generally denotes money in the form of paper or coins; cryptocurrencies are neither currency nor money.
HMRC has now provided what it considers to be a ‘a clear, logical, predictable and objective rule which can be easily applied’ when determining the situs of cryptocurrency exchange tokens. The guidance states that the situs of cryptocurrency is dependent on the tax residence of the beneficial owner. If the owner is resident in the UK for tax purposes, exchange tokens will be subject to UK inheritance tax and any disposals will be subject to capital gains tax.
A contrary view is that cryptocurrencies should instead be located where they can be retrieved. For instance, if they are located on a hard drive held outside the UK, then those assets would be non-UK situated assets. Being able to place cryptocurrencies in a different jurisdiction, would, in theory, allow remittance basis taxpayers to undertake tax planning with respect to their UK tax position on any gains from the crypto assets and protect the value of the crypto assets from UK inheritance tax. This, however, is not envisaged by HMRC whose guidance indicates that those resident in the UK will de facto make their crypto assets UK situated assets purely by reference to their own residence position.
For those who are using cryptocurrency as a form of investment then they need to keep a record. HMRC have confirmed that the onus is on the taxpayer to keep separate records of each crypto asset transaction, and this information should include: the type of crypto asset, the date of the transaction, if they were bought or sold, the number of units, the value of the transaction in pound sterling, the cumulative total of the investment units held and bank statements and wallet addresses, if needed for an enquiry or review from HMRC. Needless to say, your accountant would thank you for accurate record keeping while they are frantically trying to survive the inevitable January rush to submit self-assessment returns.
Finally, crypto assets received as employment income are treated as ‘money’s worth’ and are subject to Income Tax and National Insurance contributions on the value of the asset. I am sure there are many who would relish the opportunity to be paid in the form cryptocurrency, and those who do should remember that if that cryptocurrency received as income increases in value and they sell it for cash, then they will need to let the Exchequer know and wire them some boring old sterling to settle their tax liabilities. Luddites.
Colin Senez is a senior associate at boutique private wealth law firm Maurice Turnor Gardner LLP.