THE RAPID GROWTH in cryptocurrency and distributed ledger technologies, such as Bitcoin and Ethereum, has seen a large spike in businesses, traders and investors entering the fray. Naturally, the unique characteristics of cryptoassets has attracted significant attention from HMRC and tax authorities worldwide in a bid to clamp down on those purportedly using cryptocurrencies to avoid tax and hide assets.
As a result, HMRC are increasingly enquiring into businesses, traders and investors using cryptocurrencies and other hidden “value transfer systems” to ensure that all individuals and businesses involved declare their fair share of tax.
In today Shipleys Tax brief we look at what cryptocurrency and “value transfer systems” are under scrutiny and why businesses, traders and investors need to ensure they understand the taxation implications of holding these assets and structure them properly in order to be tax efficient and remain HMRC compliant.
What types of assets are covered?
Surprisingly, it’s not only cryptoassets like Bitcoin and Ethereum on the taxman’s watchlist, other wide ranging assets types include:
- assets in E-money wallets like PayPal.
- assets in ‘value transfer’ systems, such as Black Market Pesos (a system reportedly used by drug cartels, which converts drug sale revenues in the US and Europe to local currencies without the money having to cross a border);
- Hawala, a similar money transfer system common in the Middle East, Asia and Africa
- “Committee” – a trust-based money transfer system commonly practised in the UK within some Asian communities.
According to HMRC, although the majority of individuals and businesses pay the tax due, it suspects there are taxpayers using e-money, value transfer systems and cryptos to hide assets and commit tax evasion and avoidance. The fact that some of the systems mentioned above are rooted in cultural, societal or even religious traditions is perhaps lost in translation by HMRC. Unfortunately, misunderstanding and cultural insensitivity in some these cases can give rise to unfounded allegations of tax fraud and tax evasion.
How are Cryptoassets taxed?
Generally, cryptoassets are not considered to be currency or money (fiat) by key financial institutions. From a tax perspective, cryptoassets are treated as with other investment assets such as stocks and shares and is taxed accordingly.
In practice, tax follows the underlying activity in which cryptocurrency is being acquired or sold. As such, crypto investors and traders must consider the wide degree of transactions ranging from basic purchase and sell orders to hard forks, airdrops, and such like.
Income tax – this is generally applied to individuals who are buying and selling, or receiving cryptocurrency, as part of a trade. The most obvious would be the ‘day-trader’ who is actively buying and selling cryptoassets with the view to realising a short-term profit. However, there multiple hurdles to overcome before you can be treated as trader, so a person who trades on their own account alone is unlikely to meet the description of a “trader“ for income tax purposes
Capital Gains Tax – in most cases therefore, an individual buying, holding and selling cryptocurrency on their own account will be deemed to carry on an investment activity and subject to capital gains tax.
Non-UK Residents and Domicile
For those that are not UK tax resident or do not have a domicile in the UK, they could potentially benefit from favourable tax rules in relation to cryptoassets.
This revolves around the issue of location or “situs” of the cryptocurrency. The current HMRC view is that cryptoassets follows the residency of the individual.
As such, if a person is non-UK resident, then there will not generally be any tax exposure in the UK.
Furthermore, where a person is UK tax resident, but is not domiciled in the UK, they may elect for the remittance basis to apply. This generally allows a person to escape UK taxation on foreign income and gains until those foreign income and gains are remitted to the UK but would indefinitely avoid it otherwise.
However, this is a simplistic approach to a complex issue and there is currently little authority in favour of HMRCs interpretation. For example, there is no consensus as to the location of the cryptoassets. Is the location for example,
- the exchange entity holding cryptoassets, or
- the services which host the technology?
Due to the complexity involved, any such position taken should be well thought out and disclosed accordingly with the potential for HMRC to query and/or challenge any claim.
With that said, it would not be an unreasonable approach to properly structure cryptoassets such that income tax or capital gains tax can be mitigated, subject of course to the appropriate disclosure and filings.
At Shipleys Tax we can help you ensure that your cryptoassets are structured properly. We can assist in calculating your taxable gains or losses on your cryptocurrency transactions, and deal with your HMRC filing obligations thus ensuring you are fully compliant. We can also advise on the structure of holding cryptoassets to minimise UK taxation. We can also assist those who are non-UK domiciled and who may have specific tax needs relating to this area.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email firstname.lastname@example.org.