Solicitors in Westminster, London
Demystifying the situs of Crypto Assets for the Crypto Curious
by Elizabeth Nicholls and Catherine Pugsley
Elon Musk, the Tesla billionaire, has been sharing his bullish Doge Theory with the world as he took on Jack Dorsey the Twitter CEO earlier this week. Propounding his theory that Dogecoin is money and not a speculative asset, the price of both Doge and Ethereum immediately rose by 10%.
This recent growing interest in crypto assets has been stirred by press attention and the fluctuations in value and most readers are familiar with the names Bitcoin, Ripple, Doge and Ethereum or as they are collectively known, cryptocurrencies.
What are cryptocurrencies?
There are thousands of cryptocurrencies and each currency is made by a different method. However, the unifying factor for all cryptocurrencies is the secure way in which they are created and stored. For example, take the cryptocurrency Bitcoin. Bitcoin ‘miners’ check for transactions on a central network, and then use a combination of computer technology and mathematical equations to determine which transactions are valid. If valid, the Bitcoin miners record the transactions on a public log setting out who owns what – this is known as Distributed Ledger Technology (DLT). For Bitcoin, the ledger is known as Blockchain. As transactions are validated, this data is added to ‘blocks’ at the end of the ledger, with each block containing a reference to the previous block. This has the effect of making the DLT extremely secure and incredibly difficult to intercept.
Many people are investing in cryptocurrencies because they expect to see the value of their investment rise. Others are investing in cryptocurrencies because there is no central bank or government to manage the system, giving individuals more control over their funds. However, this means that if funds are stolen, there is no central authority responsible for helping to recover your money, making cryptocurrencies a risky investment.
Situs of cryptocurrency
The regulation of cryptocurrencies is constantly evolving. As an intangible, digital asset, it initially seems impossible to identify the location or situs of a cryptocurrency for tax purposes.
In a recent decision, following a dispute over the ownership of cryptocurrency after a fraudulent initial coin offering, the English Court held that cryptoassets can be treated as property and that the law of the country in which the assets are located is the law of the country where the person or company who owns the cryptocurrency is domiciled for litigation purposes. If this approach is maintained by the Court it may well be in conflict with the position taken by HMRC regarding the situs of crypto assets.
This point is particularly relevant for UK resident non domiciled individuals.
HMRC has specified, in its recently released manual, that an individual’s crypto assets, specifically ‘exchange tokens’ such as Bitcoin, are to be considered as being located in the same jurisdiction in which their beneficial owner is resident. This is at odds with the UK remittance basis of taxation and will result in any non-UK domiciled individuals having to pay UK tax on all cryptoassets held.
Whilst HMRC have provided a clear, straightforward rule in an area of increasing complexity the effect on this for the UK resident non-UK domiciled individual will be myriad. If, for example, they purchase cryptocurrency with funds held outside the UK this will automatically amount to a taxable remittance into the UK. If the cryptocurrency benefits from an upward price fluctuation thanks to the Musk-Dorsey sound bites, any gains will be taxed in the UK.
Given the nature of crypto assets and their ability to be held in a variety of ways, particularly if the cryptoassets are simply a digital representation of any underlying assets that may not have its situs in the UK, it is likely the rules around the taxing of crypto assets will continue to be modified for years to come.