UK taxation of cryptocurrencies: a summary of the Dec 2021 position

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There remains great uncertainty as to how the UK should tax profits from investing in cryptocurrencies.  

Information gathering

HMRC has been using its extensive information gathering powers to obtain details of holders of cryptocurrencies through the cryptocurrency exchanges.  For example, Coinbase, one of the best-known exchange platforms, has confirmed that it has provided details of all UK resident taxpayers who in the 2019/20 UK tax year entered into cryptocurrency transactions worth more than £5,000.  The US and the EU are also undertaking reviews on how to obtain more information about crypto transactions.

Is cryptocurrency a currency?

The basic premise of the UK’s approach to the taxation of cryptocurrency is that it is not, in fact, a currency.  The Cryptoasset Taskforce in their final report from October 2018 stated, “While cryptoassets can be used as a means of exchange, they are not considered to be a currency or money...  They are too volatile to be a good store of value, they are not widely-accepted as means of exchange, and they are not used as a unit of account.”  

The motivation for HMRC’s desire for cryptocurrency not to be regarded as actual currency is fairly obvious.  HMRC states “the vast majority” of disposals of cryptocurrencies are subject to capital gains tax rather than income tax (CRYPTO 20050).  However, currency transactions are often exempt from capital gains tax (s.252 and 269 TCGA 1992).

Location of a cryptoasset

It is important to distinguish briefly between two broad categories of cryptoasset.  Firstly, cryptoassets can be linked to a physical asset.  For example, rather than carry around a bar of gold bullion, a person may have a token that represents that bar of gold.  Such a token is still a cryptoasset but it is an ‘asset-linked cryptoasset’.  Other cryptoassets, such as most cryptocurrencies, are not linked to a specific asset and are known as ‘non-asset-linked cryptoassets’.  

HMRC’s approach to the situs of cryptoassets is that asset-linked cryptoassets are situate where the asset they represent is located.  For non-asset-linked cryptoassets HMRC acknowledges that there are currently no statutory provisions for the taxation of cryptocurrencies and therefore they will treat the cryptoasset as being resident where the beneficial owner of that cryptoasset is resident (CRYPTO 22600).  

In response to HMRC’s cryptoasset manual, STEP published their guidance on 3 September 2021, which proposes that the situs of cryptoassets should be with reference to the residency of the exchange that holds those assets.

The recent case of vs Persons Unknown [2021] EWHC 2254 proposed a third approach to the question.  Mr Justice Pelling QC stated that the lex situs of cryptocurrency is where its owner is domiciled, doing away altogether with considerations of residence.  This was also reportedly the approach taken in Ion Science Limited v Persons Unknown (2020, unreported).   

In conclusion, it is unlikely to be long before there are sufficient sums at stake for a person to challenge HMRC’s opinion that a cryptocurrency is not a currency for the purposes of UK taxation.  For crypto investors who pay UK tax on the remittance basis, the more immediate question is which of the three approaches proposed by HMRC, STEP and the courts should they adhere to when completing their tax return.  

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