While a few recent court cases involving cryptocurrency have been heard, the majority of the time we are seeing taxpayers, advisors and HMRC applying case law and legislation which was written well before concepts such as blockchain or cryptoassets existed. The lack of specific law focused on crypto means that taxpayers must concentrate less on the nature of the asset itself but more upon the motives, behaviours and actions taken by the taxpayer when entering into crypto transactions.

Casual or Professional?

The casual tax-paying crypto investor can be broadly comfortable that receipts and expenditure will be of a capital nature. Consequently, any gains will be chargeable to Capital Gains Tax (CGT) upon the disposal of the asset, with any losses carried forward. The annual CGT exemption will be available, meaning many crypto investors with modest gains will have little or no actual liability. The nature of casual crypto-trading is such that for many individuals they may, from a tax perspective, be better off using a spread betting (or similar) gambling platform to effectively gamble on the price movement of the underlying asset (such as Bitcoin) as any gains will generally be tax-free, even for many professional gamblers.

Where a taxpayer engages in a more organised and regular series of transactions, the possibility that they will be said to be trading, and any profits subject to Income Tax and Class 4 National Insurance Contributions, increases. The test to apply will be no different to the well-known ‘badges of trade’ tests which have been considered at length over decades of case law. Ultimately, the motive for entering the transactions, and the extent to which a series of pre-ordained steps have been taken with a view to generating a profit, will be essential in determining the difference between the casual crypto ‘investor’ and someone who is carrying on a crypto trading business.

How are non-domiciled residents affected?

For non-domiciled taxpayers who claim the remittance basis of taxation and hold their crypto assets in digital wallets outside of the UK, there is often a misconception that any gains can be excluded from UK taxation if they are not remitted to the UK. So, it’s important to understand whether there is an underlying asset or not, as HMRC’s view is that where there is an underlying asset (for example where a token represents ownership of a gold bar), the token is situated where the underlying asset is located for capital gains purposes.

If there is no underlying asset, exchange tokens (such as Bitcoin) are taxable on tax residents of the UK regardless of where the digital wallet is held. Additional complexity can also arise where a remittance basis filer, investing wholly in offshore cryptoassets, uses untaxed mixed funds to invest, but is then subject to the remittance basis ordering when determining any capital gains to report. Added to this, remittance basis filers may not be entitled to the CGT annual exemption meaning they cannot rely on this to exclude any gains from UK taxation.

And the importance of due diligence?

Other activities beyond crypto currency trading can produce even more challenging tax issues. For example, the sale of digital artworks and other Non-Fungible Tokens (NFTs) by a VAT-registered business poses questions regarding where the place of supply takes place. There is no clear answer on whether selling an NFT is supplying an ‘electronic service’, which would make the place of supply the country in which the customer is situated, or if the standard rules apply, placing the supply where the supplier is situated. Such issues pose significant due diligence challenges for suppliers of NFTs in establishing where a customer may be based, especially when considering the eye-watering sums paid for NFTs such as the ‘Merge’ work of digital artist Pak for over $90 million.

Would you like to know more?

We work with the full range of technology companies, from start-ups to established internationals, and our experienced team is here to help. Tech companies face specific tax risks and opportunities, and we can provide support through efficient tax strategies and compliance.

If you would like to discuss how we can help you, you can visit our dedicated Tech page, contact your usual Blick Rothenberg contact or Rehana Earle or Matt Crawford using the form below.