Cryptoassets have been big news in recent years, not least because of the speculative bubble surrounding bitcoin. An issue less frequently covered is the tax implications of investing in these financial instruments.
At the end of 2019, HMRC set out its views on the UK taxation of cryptoassets. The document has important implications for UK non-domiciled residents who hold investments in these assets.
For those wondering what a cryptoasset is, the one you are most likely to have heard about is bitcoin but there are thousands of cryptoassets – or cryptocurrencies as you might know them - out there. They are essentially a type of electronic cash and while the underlying concept, use and security of these assets has been the subject of considerable debate, for the purposes of this discussion they are generally held as investments by people who expect their value to rise.
HM Treasury, the Financial Conduct Authority and the Bank of England have identified three types of cryptoassets or cryptocurrency: exchange tokens, utility tokens and security tokens.
So far, HMRC has provided its view as to the taxation of exchange tokens (of which bitcoin is one). However, utility tokens and security tokens are yet to be fully considered, while this might sound like the realm of science fiction, the Kaspersky Cryptocurrency Report 2019 revealed that 19 per cent of people surveyed had invested in cryptoassets.
What is HMRC’s standpoint on cryptoassets?
HMRC has never considered cryptoassets to be currency. Generally, the withdrawal of money from foreign currency accounts is not (at least since 6 April 2012) considered an event for capital gains tax purposes and so exchange rate movements are not taxed. With the explosion of growth in cryptoassets, and the likely reality that individuals hold these as an investment, it is perhaps understandable that HMRC would want to seek to tax.
HMRC’s view is that the situs (the location of property for tax purposes) of a bitcoin or other exchange token is the place of the individual’s residence. Therefore, a UK tax resident individual has a UK sited asset.
What is the issue with this? None, if you are UK tax resident and domiciled, as you are taxed on your worldwide income and gains, so situs is perhaps not an important issue. It seems reasonable to expect to pay tax on gains made.
How does this affect non-doms?
There is an issue for those individuals who are tax resident in the UK but have a domicile outside of the UK and may have chosen to be taxed on the remittance basis. Those choosing this basis are only taxed on UK arising income/gains and on overseas income/gains remitted to the UK.
I doubt such individuals will have realised any investments in cryptocurrencies would be assessable on them in the UK, given that HMRC now regard these as being sited where the individual is resident. Further, will such individuals be aware of the fact such assets are now considered to be UK sited for inheritance tax purposes?
If such a person had considered the tax position of their investments in cryptoassets, they may naturally have considered the situs to be where the digital wallet storing the cryptoassets is, which they may have considered to be outside the UK.
Naturally, such individuals should reconsider their tax position.
Finally, whilst the point of this article has been to highlight an issue with those who are resident non-doms, I should mention the reality that there are a lot of individuals who may not have dealt with the tax aspects of gains arising in such assets, whether through ‘burying their head in the sand’ or deliberately evading the issue. Neither option is appropriate. Our firm can assist such individuals with regularising their affairs.
By Tax Manager, Paul Webb
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