Each week, Spear’s sits down with an adviser in the world of wealth to talk about an issue or question that directly affects the lives of high-net-worth individuals. This week, Dominic Lawrance, partner at Charles Russell Speechlys, explains everything HNWs should know about UK cryptocurrency tax.
What are the current laws around cryptocurrency tax?
HMRC’s guidance is out there, and it takes the position that for tax purposes crypto is situated where the holder is resident. That’s a very novel proposition in the law of situs of assets. Normally, there are a number of different tests which can apply to the situs of assets. Sometimes it’s the location of a register and location of registered assets, like registered shares. In other cases, it’s where the counter-party is resident. There’s no existing rule for situs that says it’s where the holder of the asset is resident, so that’s a really novel proposition.
It may well be that it’s where the crypto wallet is physically held that determines where the cryptocurrency or crypto asset is situated. But quite commonly, crypto is held via exchanges. So the individual doesn’t actually hold the crypto himself or herself. He or she has a contractual relationship with an exchange, which is effectively a nominee, and the crypto is stored in the exchange’s wallet servers.
So that raises the question of whether you can extrapolate from existing law in relation to things like shares that are held via nominees and say, well actually, in this situation, it’s the situs of the nominee — the exchange in this case — which dictates the situs of the crypto.
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What upcoming changes to crypto tax law look likely to happen next, if any?
To make a general comment, I think tax authorities around the world are all trying to… I don’t think there’s been any promotion of new legislation to specifically address crypto, and despite all the uncertainties, I think the general policy has been to try and use existing tax law and fit that around it, with lesser or greater degrees of success.
There’s nothing very concrete, but I think everyone accepts that this is going to become more regulated. I mean, it’s still the wild west at the moment, but regulations are starting to creep in a bit. For example, the Advertising Standards Agency has started to take an interest in adverts of crypto and are saying what they can or can’t say.
I think it’s likely that there’ll be more regulation of crypto exchanges, ensuring that there are adequate credit protection measures in place.
And this is really really speculative, but I wonder, personally, whether we might have an environmental tax on certain forms of crypto, as in those which use proof of work as a means of validating transactions. Because as we all know, the environmental costs of those systems are horrendous. I don’t know whether it’ll happen, but personally I think there needs to be some kind of drive to move to more environmentally efficient means of having these transactions.
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Tax authorities, HMRC included, are still very much playing catch up with the laws as things develop very quickly. How long do you think it will take for tax law to grow more current?
In a sense, the question is how long is it going to take us as advisors to have a clear understanding of the areas of uncertainty. That clear understanding is likely to come through case law. It is possible that HMRC may promote legislation regarding the situs of crypto for capital gains tax purposes, because there is existing statute law on the situs of assets for that. It doesn’t address crypto specifically, though, so one has to sort of apply the general principles of that statute and try to work out what that means. It’s conceivable they could slot additional sections into that bit of legislation so as to specifically address crypto. HMRC might do that if they feel that, particularly, there’s a case which goes against them.
But more generally, it’s a question of advisors and the tax authorities getting better understanding of how these things work and what the implications are for tax.
What are the most important things that HNWs who may be interested in beginning to invest in crypto or building their trading wallet, what’s the most important thing that they should know to keep their assets as good as possible?
It does depend on their domicile, because if they’re a UK resident and UK domicile, then they’ll just need to accept that basically any returns from crypto are going to be subject to tax.
And for those individuals, often the key point is making sure that they keep records that are sufficient to allow them to report correctly. A surprising number of individuals who dabble in this area seem to have no appreciation of the fact that if, for example, you switch out of one particular currency into another one, that’s a disposal. And if the first currency’s gone up in value, then you realise the gain at that point. If you are switching around a lot, or buying and selling a lot — or also if you’re entering into these decentralised finance transactions — the report implications very quickly become nightmarishly complicated.
And there are software packages out there now which purport to keep a track of all this, so individuals in that position ought to consider buying that kind of software so that they can accurately report.
Where non-domiciliaries are concerned, obviously there’s these questions about situs, because if you structure things in the right way and you take a certain view of the law, then it’s possible to avoid having tax liabilities on crypto by virtue of the territorial limitations of the UK tax system. So for those individuals, those situs questions become really important.
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