With cryptocurrencies shooting up in value, the existence of a new breed of HNW ‘miners’ with digital money worldwide will no doubt peak HMRC’s interest, writes Jennifer Emms
Cryptocurrencies are not a new phenomena. The first, and arguably still the most famous cryptocurrency, Bitcoin, was introduced eight years ago and there is an ever-increasing number of them: Ethereum, Ripple and Litecoin to name but a few.
More and more businesses in the UK are willing to accept cryptocurrencies. You can now use cryptocurrencies to buy a range of items from that morning cup of coffee to high value artworks. They also receive significant press coverage. The most recent being reports of the dramatic Bitcoin ‘civil war’, being waged around the world as I write. Proponents of Bitcoin and investors alike are waiting with bated breath to see if it will lead to the creation of rival cryptocurrencies.
Despite this notoriety and their potential for common usage,for most people, cryptocurrencies are still shrouded in mystery. Illegal in some countries, with a fluctuating price that has managed to exceed that of an ounce of gold at times and originating from an unknown creator who uses the name Satoshi Nakamoto, they are a strange concept. So what is the reality behind cryptocurrencies?
For me (and anyone else who is not au fait with the world of coding), to invest in a cryptocurrency, I would need to purchase ‘coins’ of the cryptocurrency by swapping them for other currencies or assets. The cryptocoins can only be spent using keys which are stored in a ‘wallet’ held on a device such as my computer or mobile. Spending coins transfers value between my wallet and a third party’s wallet and all such transactions must be confirmed by other users of the system. They verify the code in a process called ‘mining’, which earns those other users (who have better technological expertise!) their own cryptocurrency. All transactions are then recorded in a public ledger.
Essentially, the transactions are ‘peer-to-peer’ so that no financial institutions are involved. This has the advantage of no bank or credit card processing fees as well as no or limited regulation and user anonymity. The value of key cryptocurrencies has increased significantly, although the value can be volatile. Whether there is a market bubble waiting to burst is a matter of frequent debate.
And what about the UK tax treatment? HMRC have issued limited guidance on cryptocurrencies. This makes clear, for instance, that businesses that accept cryptocurrencies as payment for goods and services will be taxed in the normal way (as could be expected). It also specifies that income received from ‘mining’ is outside the scope of VAT. One aspect that is notably missing is how the remittance basis will apply to cryptocurrencies.
Broadly, UK resident but non-UK domiciled (and not deemed domiciled) individuals who claim the remittance basis of taxation are only taxable on foreign income or gains from a year of UK residence if they ‘bring’ them to the UK. It is clear that there is a remittance if cryptocurrency coins, purchased with foreign income, are actually spent in the UK but is simply bringing a phone on which a ‘wallet’ is stored (and from which such coins are capable of being spent) a remittance of itself? The position is obvious for standard currency: if physical coins are located in the UK, they will be ‘remitted’, and the same is true of funds in a UK bank account. But in the context of cryptocurrency, is it right to equate a wallet with physical cash (particularly when it can be backed up in other locations and on the internet)? Is the true asset the code? Where is this located? Like a lot of facets of cryptocurrencies, the approach that HMRC will take is unclear.
So, is investing in a cryptocurrency like putting it all on red? Will we all be using cryptocurrencies in the future? Only time will tell.
Jennifer Emms is a senior associate at boutique private wealth law firm Maurice Turnor Gardner LLP.