Posts by: Bridget Winters

HMRC’s New Approach to Cryptoassets – Tax First, Define Later

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The UK tax authority, Her Majesty’s Revenue & Customs (HMRC), has taken a further step towards tackling perceived tax avoidance in transactions involving cryptoassets. Specifically, according to press reports, exchanges such as eToro, Coinbase and CEX.IO have received letters from HMRC requesting customer and transaction data.

The move follows HMRC’s most recent policy paper, “Cryptoassets for Individuals,” published in December 2018, which in turn built on the brief general guidance published by HMRC four years earlier in 2014. The 2018 policy contains the statement that HMRC will apply the relevant income or capital gains tax provisions by looking at the factual details of each circumstance rather than by reference to terminology.

While the policy paper does distinguish between exchange tokens, utility tokens and security tokens, in practice we expect HMRC to focus on a transaction’s factual elements, rather than the description of the cryptoassets.

In contrast to HMRC’s approach, the UK financial regulator, the FCA, has recently revamped its classification of cryptoassets, clearly defining which ones among them would not fall within the scope of its regulatory regime, the Financial Services and Markets Act 2000. HMRC is yet to comment publicly on this development, but it is hoped that HMRC will follow suit and provide taxpayers with more certainty in determining their tax obligations in relation to cryptoassets.

Interestingly, on the other side of the Atlantic, the U.S. Internal Revenue Service (IRS) was also reported to have sent compliance letters to holders of cryptocurrency, warning them of the consequences of their potential non-compliance with relevant tax obligations. It is not clear whether the letters are limited to those taxpayers identified in the Coinbase Summons in 2016. The IRS believes that in 2017 up to $90 billon in cryptocurrency gains went unreported. On the Chain authors have written on the topic previously here, here and here.

While the IRS confirmed in 2014 that virtual currency ought to be treated as property for tax purposes, HMRC has, so far, used the word “property” only to describe cryptoassets for inheritance tax (IHT) purposes. Whether a similar approach will be taken for other UK taxes is yet to be confirmed and cannot be assumed.

The Financial Committee of the City of London Law Society published a paper that provided a potential framework for legal classification of cryptoassets. According to the Committee, exchange tokens could constitute a new category of personal property that is neither a “chose in possession” nor a “chose in action,” subject to the Supreme Court extending the notion of personal property to such assets.

In order to tap into the value generated by cryptoassets, HMRC’s approach has been to treat cryptoassets as property in relation to IHT and as “assets” in relation to other taxes. This approach is potentially quite unclear for taxpayers if we consider that, at the time of writing, there is no legislative basis (judicial or statutory) for the classification of cryptoassets as property. The fact that HMRC has recognized cryptoassets as property only in relation to IHT, and not for other UK taxes, adds to the uncertainty.

This uncertainty, coupled with the fact that most taxing legislation was drafted before digital assets even existed, means there is an urgent need for clarification on their legal status.

This is relevant to all value-generating actions involving cryptocurrencies, including the UK tax treatment of:

  1. options on tokens – will this mirror the taxation of options over shares?
  2. ICOs – will these be taxed in the same way as IPOs? and
  3. the transfer of tokenized shares – will these fall within the scope of stamp duty?

At the moment, there is no clear answer.

One thing does seem certain, however – blockchain is a harbinger of a new way of generating value and its potential will be fully leveraged only when the tax and legal frameworks around it have reached a serviceable level of cohesion. How and when this will be achieved is difficult to say.

HMRC Publishes UK Tax Guidance on Cryptocurrency for Individuals

On December 19, HM Revenue and Customs (“HMRC”), the UK’s counterpart to the US Treasury, published long-awaited (and arguably long overdue) guidance on the taxation of cryptocurrencies (which it refers to as “cryptoassets”), building on the UK government’s Cryptoassets Taskforce’s report that was published last year. This guidance is welcome in an area of law that needs to play catch-up to apply to income and gains on technology and digital assets. It is important to note that this guidance is limited to HMRC’s view in relation to individuals holding cryptoassets and does not extend to tokens or assets held by businesses. However, HMRC states its intention to publish further guidance in relation to the taxation of cryptoasset transactions involving business and companies sometime in the future.

The guidance confirms that HMRC does not consider cryptoassets to be currency or money for tax purposes and separates cryptoassets into three categories of “tokens”: exchange tokens, utility tokens and security tokens. This guidance focuses on the taxation of “exchange tokens,” a term encompassing assets such as Bitcoin, which presumably it considers to be the most prevalent and widespread. The approach is very similar to the IRS’ approach in this area in Notice 2014-21. HMRC considers that in the “vast majority” of cases, individuals hold (and acquire and dispose of) cryptoassets as part of a personal investment and will, therefore, be liable to capital gains tax. The analysis of whether the cryptoassets are held in the nature of a trade or an investment, and the consequential tax treatment, will largely follow the existing approach and case law but HMRC only expects individuals to be buying and selling cryptoassets with such frequency, level of organization and sophistication such that it amounts to a financial trade in itself in “exceptional circumstances”. If, following the application of the traditional analysis, the cryptoassets are considered to be held as part of a trade, then the Income Tax provisions will take priority over the capital gains tax provisions.

Individuals will be liable to Income Tax (and national insurance contribution, where appropriate) on cryptoassets which they receive from their employer as a form of non-cash payment (and which may be collected via withholding tax) and/or in return for “mining” the cryptoassets, “transaction confirmations” or “airdrops” The guidance describes these transactions and the applicable taxes. As discussed in the guidance, miners are the people that verify additions to the blockchain ledger. They may receive either cryptocurrency or fees for this function. An airdrop is where someone receives an allocation of tokens or other cryptoassets, for example as part of a marketing or advertising campaign in which people are selected to receive them. As pointed out in the guidance, while the receipt of cryptoassets is often subject to the income tax, appreciation will be subject to capital gains tax upon disposition.

In addition to the tax analysis, HMRC points out that cryptoasset exchanges might only keep records of transactions for a short period, or the exchange might no longer be in existence when an individual completes their tax return. The onus is, therefore, on individuals to keep separate and sufficient records for each cryptoasset transaction for the purposes of their tax records.