Crypto tax: How the UK regulates crypto assets

Tax legislation in respect of crypto assets is very much in its infancy and differs from country to country.

This is because the crypto asset sector is fast-moving and developing all the time. The terminology, types of coins, tokens and transactions can vary. The evolving nature of the underlying technology and the areas in which crypto assets are used means that tax legislation sometimes struggles to keep up.

UK non-domiciled status typically has tax benefits

If you move to the UK, you will generally be classified as a non-domiciled individual.

Without going into detail, this status affords you some advantageous planning opportunities in terms of your assets held outside the UK. This includes tax advantages, such as exclusion from inheritance tax and protected income status of those assets, which endures even once you are deemed domiciled or domiciled under the common law.

Non-domiciled individuals typically hold their crypto assets in wallets that were set up outside of the UK. But do the rules that apply to other assets held outside of the UK apply here?

Determining the location of exchange tokens

When considering the location of an intangible asset, the courts will generally look at the nature of the asset to find a suitable comparison.

For Capital Gains Tax, sections 275 and 275A of the Taxation of Chargeable Gains Act (1992) provide statutory rules for determining when particular types of assets will be deemed to be in the UK, but these are unlikely to apply to exchange tokens in most cases.

For inheritance tax purposes, UK common law applies to the extent that a Double Taxation Agreement (DTA) between the UK and another country does not determine the location of the asset. As such, it is important to be completely certain of your tax residency status if you have moved abroad.

Crypto assets and the UK

So, how does HMRC view crypto assets?

Firstly, HMRC does not consider crypto assets to be currency or money.

Exchange tokens are intended to be used as a method of payment (for instance, cryptocurrencies like Bitcoin). However, unlike utility or security tokens, they do not provide any rights or access to goods or services. They utilise distributed ledger technology (DLT) and typically there is no person, group or asset underpinning them. Instead, the value exists based on its use as a means of exchange or investment.

It is HMRC’s view that:

• Exchange tokens have an economic value as they can be “turned to account”*
• Exchange tokens are a new type of intangible asset (different to other types of intangible assets, such as shares or debentures)
• The only identifiable party to consider is the beneficial owner of the exchange token

* For example, exchanging them for goods, services, fiat currency (that is money declared by a government to be legal tender) or other tokens.

HMRC has considered other possibilities, but at this stage it has found that a residence-based system most accurately fits the majority of transactions. Using the residency of the beneficial owner of the exchange tokens to determine the location gives a clear, logical, predictable and objective rule which can be easily applied.

This means a person who is a UK resident and holds exchange tokens is liable to pay UK tax if they carry out a transaction with their tokens which is subject to UK tax.

Which crypto taxes will you be liable for?

Capital Gains Tax on crypto assets

In the vast majority of cases, individuals hold crypto assets as a personal investment, usually for capital appreciation in value or to make particular purchases. HMRC expects that buying and selling of crypto assets by an individual will normally amount to investment activity (rather than a trade of dealing in crypto assets). 

Crypto assets are digital and therefore intangible, but count as a “chargeable asset” for Capital Gains Tax as they’re:

• Capable of being owned
• Have a value that can be realised

If you invest in crypto assets in the UK, you will typically have to pay Capital Gains Tax on any gains you realise when you dispose of your crypto assets.

A “disposal” is a broad concept that includes:

• Selling crypto assets for money
• Exchanging crypto assets for a different type of crypto asset
• Using crypto assets to pay for goods or services
• Giving away crypto assets to another person

To work out whether you need to pay Capital Gains Tax, you need to calculate your gain or loss when you dispose of your crypto assets.

If crypto assets are given away to another person who is not a spouse or civil partner, you must work out the Pound sterling value of what has been given away. For Capital Gains Tax purposes, you are treated as having received that amount of Pound sterling even if you did not actually receive anything.

Income tax on crypto assets

You will only be liable to pay income tax and National Insurance contributions on crypto assets if you received them from:

• Your employer as a form of non-cash payment
• Mining, transaction confirmation or airdrops

If you run a business which is carrying on a financial trade in crypto assets and therefore has taxable trading profits, income tax takes priority over the Capital Gains Tax rules.

Inheritance tax on crypto assets

Crypto assets will be property for the purposes of inheritance tax. Since HMRC has taken a residency approach to crypto, this includes all crypto assets held by a UK resident, regardless of domicile status (subject to applicable DTA provisions between countries).

So, what does this mean to the non-domiciled individual?

Firstly, they will be subject to taxation as and when they dispose of any of their Crypto assets. The remittance basis of taxation (where available) will not apply due to the deeming of the asset to be UK-based for a UK resident.

Secondly, the crypto assets will be subject to inheritance tax in the UK, regardless of where they are held. There may be some exceptions to this in terms of tax treaties.

Thirdly, the ability to place the assets in an excluded property trust is not an option as trustee companies in general will not accept crypto assets into such trust structures.

A financial advisor with cross-border expertise can look at your specific circumstances to determine if there is a tax advantageous solution available to you. It is best to seek this advice before you make the move to the UK and become a UK resident.

We are a unique cross-border financial advisory firm specialising in fulfilling the needs of globally mobile clients. We are also independent and able to offer “whole of market” advice.

Let our experienced financial planners guide you through these turbulent times and light the way to a secure and certain future. Get in touch with our Wealth team by calling us on +44 (0) 20 7759 7519 (UK) or +27 (0) 21 657 154 (SA) or emailing wealth@sableinternational.com.