While it was ten years at the end of October since Satoshi Nakamoto’s paper conceiving of Bitcoin as a peer-to-peer electronic cash system, it was only in mid-2017 that Bitcoin and other cryptocurrencies became mainstream.
Many accountants will be grappling with the implications of cryptocurrencies as they work to complete 2017/18 tax returns before the 31 January 2019 deadline.
As explained by my colleague Andy Wood, there are no special rules for cryptocurrency and HMRC will apply existing tax rules in considering whether crypto activity will be subject to income tax or capital gains tax (or corporation tax if operating through a company).
Applying those rules however is challenging as we are finding as we work with growing numbers of cryptoinvestors including the location of cryptoassets or, to put it another way, where is the blockchain?
Identifying the Location of Cryto Currencies/ Bitcoin Wallets
The location (or “situs”) of an asset can have implications for taxation.
While the location of tangible property is clearer, the location of intangible assets can be more complex, but the Taxation of Chargeable Gains Act provides guidance. For example, shares in or debentures of a company incorporated in the UK are situated in the UK while other registered shares or debentures are situated where they are registered.
Unsurprisingly the current legislation makes no reference to cryptocurrency.
How might we determine the situs of any particular cryptoasset which is underpinned by distributed ledger technology and, by nature, there is no single register or location? Should we look to where the exchange is located? Or the wallet holding that cryptocurrency? Or perhaps it should be where the owner of the asset resides?
The Revenue & Customs Brief 9 published in 2014 on bitcoin and other cryptocurrencies provides no comment on situs nor do the brief comments added to the Capital Gains Manual earlier in 2018.
The lack of guidance is frustrating as important implications flow from situs.
UK resident and domiciled taxpayers are subject to tax on their worldwide income and gains. However, UK resident but non-UK domiciled individuals who are remittance basis users will only pay capital gains tax on disposal where proceeds are remitted to the UK.
Additionally, for those who satisfy the relevant conditions that their holdings could benefit from the re-basing provisions, only gains that have arisen since April 2017 would be subject to tax.
Such taxpayers may therefore wish to carefully consider the situs of their cryptoassets since it may be that rather than being taxable on the gains as they arise, which could be significant, they would be taxable only to the extent that funds are remitted to the UK.
There are further implications for historic disclosures. The Requirement To Correct introduced in Finance (No 2) Act 2017 required taxpayers to correct historic UK issues in respect of offshore income, assets and activities.
If they fail to act, they will face sanctions including punitive financial penalties including tax-geared penalties of between 100% and 200% of the uncorrected tax liabilities and a potential asset-based penalty of up to 10% of the relevant asset where the tax at stake exceeds £25,000 in any tax year.
For offshore penalties, it is not enough to identify an issue as being offshore since HMRC looks to impose different penalties according to the jurisdiction, with higher penalties for jurisdictions considered to be non-cooperative and less transparent. There could therefore be a very significant difference between penalties for a tax liability in relation to a Category 1 jurisdiction such as the Channel Islands and a Category 3 jurisdiction such as Panama.
Identifying the precise jurisdictions in respect of which a cryptoasset liabilities arise could therefore be important for determining the potential penalties and, where there is a diversified portfolio of cryptoassets, these could include many different jurisdictions with different potential penalty levels.
Future Changes on Crypto Currencies, Crypto Assets
The Cryptoasset Task Force which includes HM Treasury, the Bank of England and the Financial Conduct Authority, has published its final report alongside the 2018 Budget.
The Task Force was established in March 2018 by the Chancellor with a view to establishing the UK’s policy and regulatory approach to cryptoassets such as Bitcoin and other cryptocurrencies as well as distributed ledger technologies such as blockchain more generally.
HMRC too are engaged in updating their guidance on the taxation of cryptocurrencies, with some changes already made to the Capital Gains Manual in early 2018, and more guidance is anticipated in early 2019, whether that includes guidance on situs remains to be seen.
Unfortunately for those completing their 2017/18 self-assessment tax returns before the 31 January 2019 deadline, they will have to rely on the scant existing guidance from HMRC and apply existing principles of taxation to these new and unfamiliar assets.
Practically, whatever view is taken on situs or other areas of doubt, reasoned and robust disclosures are recommended in tax returns to ensure that should HMRC adopt a contrary view, the taxpayer is protected from enquiries and discovery assessments.
If you or your clients need help with tax issues relating to cryptocurrencies or crypto trading or gambling or indeed if there are any other tax issues that you feel we may be able to help you with, please contact us at firstname.lastname@example.org or on 01925 363006. You can also read more about tax and cryptocurrencies below.