UHY Ross Brooke Chartered Accountants

Crypto complexity – where are cryptoassets located?

crypto tax advice

Tom Annat Tax Manager blog imageCrypto currency is a topic which is rarely far from the news headlines these days and not always for the right reasons.

By Tom Annat, Tax Manager

The early hype suggesting we would all be buying our morning coffee with Bitcoin has yet to come to fruition. Whilst for many, crypto currency is not yet part of daily life, huge sums of money are being traded online through crypto exchanges. How these transactions are treated for tax purposes has presented a problem for tax authorities across the world.

Tax authorities are playing ‘catch up’ and the rules can vary drastically from country to country. In the UK, HMRC has produced a crypto-assets manual (HMRC Crypto currency manual) which goes some way to explaining their view on the tax treatment of these assets. However, there is no specific legislation in the UK for crypto-assets and so they must fit within existing tax framework. Unless specific legislation is introduced, we are likely to see an increase in cases brought before the courts.

Location (situs) for tax purposes

The location of assets is important for two key areas of UK taxation. Firstly, a UK resident and non-domicile individual has the option to be taxed on the “remittance basis” of taxation. This alternative tax treatment can enable a person to be taxed on foreign income and gains only to the extent they are “remitted” to the UK. Secondly, a non-domiciled individual would generally only be subject to UK inheritance tax (IHT) on their UK situs assets.

Requirement to Correct (RTC)

An area which could get overlooked within all of this is HMRCs Requirement to Correct (RTC) regime. This legislation was introduced to counteract offshore tax avoidance. Under the regime, taxpayers with an offshore tax issue had an amnesty under which they could bring their tax affairs up to date by 30 September 2018 and fall under the existing penalty regime (lower penalties). Taxpayers who did not bring matters up to date by then, face far larger penalties which can be in excess of 200% of the tax due (plus interest).   

Therefore, it is crucial to establish which assets are within or outside the UK for these taxpayers.

Situs of Exchange Tokens

HMRCs crypto manual contains a section which discusses the situs of ‘exchange tokens’ which are crypto tokens such as Bitcoin. The guidance does not extend to ‘utility tokens’ or ‘security tokens’.

HMRCs view is that exchange tokens will be located in the UK at any time the beneficial owner is located in the UK. Therefore, the situs of crypto-assets will follow the residence status of the beneficial owner for all taxes. This view is clearly at odds with legislation relating to non-UK doms and would remove the right to claim the remittance basis on crypto-assets.

In the recent case of Fetch.ai relating to fraud, the court’s view was that the situs of a crypto-asset should be the place where the owner is “domiciled” rather than where the owner is “resident” for tax purposes. This is a conflicting view to HMRCs manual.

The Society of Trust and Estates Practitioners (STEP) has produced its own guidance on the subject. They also appear to have a view which is at odds with HMRC. They suggest:

“In the case of cryptocurrency, it can be only dealt with by the use of the private key and, arguably, its location should be linked to the location of the private key or of the person who has control of the private key (who may or may not be the beneficial owner)”. 

If the private key is controlled by a custodian or a trustee, consideration should be made to the location of that person in determining the situs of the cryptocurrency.

Common law rules should be applied in determining a crypto-asset’s location rather than the UK statutory residence test (SRT). The SRT is used to only determine the residence status of an individual and “the location of an asset is a general common law concept and is relevant for purposes which go beyond taxation.” STEP argues that if a reliance on the SRT is made in this way, then this would need to be expressly legislated for.

In adopting HMRCs position, a UK resident non domiciled individual purchasing crypto currency with funds outside of the UK will have automatically made a taxable remittance into the UK. This could clearly catch taxpayers unaware. HMRC’s interpretation on the situs of crypto-assets is one which will be challenged and the rules around crypto-assets will need to be modified as the position evolves. 

Next steps

If you have any questions surrounding your position on crypto currency, making a disclosure to HMRC or, your position relating to non-resident and non-domicile issues then please contact us.

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