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Last updated: 11 Aug 2021
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Where is my cryptocurrency?

In this article we examine HM Revenue and Customs guidance regarding the location of cryptocurrencies for tax purposes and what this means for non-domiciled individuals.

Cryptocurrencies have for some time been an accepted medium of exchange in the digital environment. As with any relatively new asset; however, it is not obvious in advance how gains on their sale are taxable. HM Revenue & Customs (HMRC) have published guidance on the question but some of its proposals are contentious, particularly for non-domiciled individuals using the remittance basis.

While gains realised from the exchange of foreign currency in bank accounts are exempt from UK tax, it is commonly agreed that cryptocurrency is an intangible asset and that gains on its disposal are subject to Capital Gains Tax (CGT). The question of where cryptocurrency is located for CGT purposes has, however, not been addressed in the legislation and we have not seen any Tribunal cases confirming the position. 

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Howard Ledingham

+44 (0)20 7556 1206
ledinghamh@buzzacott.co.uk
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Cryptocurrencies have for some time been an accepted medium of exchange in the digital environment. As with any relatively new asset; however, it is not obvious in advance how gains on their sale are taxable. HM Revenue & Customs (HMRC) have published guidance on the question but some of its proposals are contentious, particularly for non-domiciled individuals using the remittance basis.

While gains realised from the exchange of foreign currency in bank accounts are exempt from UK tax, it is commonly agreed that cryptocurrency is an intangible asset and that gains on its disposal are subject to Capital Gains Tax (CGT). The question of where cryptocurrency is located for CGT purposes has, however, not been addressed in the legislation and we have not seen any Tribunal cases confirming the position. 

The importance of location and how it determines tax liability

The importance of location and how it determines tax liability 

The location of an asset is primarily important for UK resident but non-UK domiciled individuals who elect for the remittance basis. For such persons, gains on UK-situated assets are subject to CGT immediately but gains on non-UK-situated assets are only subject to CGT as and when the proceeds are brought (‘remitted’) to the UK. Additionally, where a UK-situated asset is purchased using unremitted foreign income or gains, this is treated as if those amounts were brought into the UK, which counts as a taxable remittance.

It is also important to determine the location of an asset for Inheritance Tax (IHT) because non-UK domiciled individuals are only subject to IHT on UK-situated assets. Location of an asset for IHT is determined by case law, whereas CGT is primarily determined by legislation. 

HMRC’s stance

HMRC’s stance 

HMRC first published guidance on their position in December 2019, stating (with a cursory explanation) that the location of cryptocurrency for IHT purposes should follow the residence status of the owner and that, since the CGT legislation does not cover the point, residence should also determine the location for CGT. Their latest update in March 2021 in the form of a HMRC Cryptoassets Manual, while being helpful in setting out the broad tax principles underpinning cryptocurrency, did not develop their stance concerning the location of the asset. 

HMRC’s main argument seems to be that: “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.” Determination of residence may well be more predictable and objective than it used to be, but whether a person’s residence is a logical pointer to the location of an asset is more debatable.

Response from the profession

Response from the profession

The reaction from the tax profession is critical of the guidance, on the grounds that HMRC have not sufficiently justified the criterion of residence. In other contexts, the location of an intangible asset depends on the commercial environment, such as the location of the relevant trading exchange or the place where a contractual claim can be enforced. 

The absence of legislation on the question has opened up a policy vacuum, which HMRC has attempted to fill with a commercially arbitrary test, based to all appearances on little more than expediency. 

Despite the continued uncertainty, we have already seen evidence of HMRC applying their new guidance to real cases. It may well take a Tribunal or Court judgement to clarify the position, or, perhaps even better, a legislative change which addresses the issue.

Pending such clarification, there will be continuing uncertainty for taxpayers who have already reported gains realised on cryptocurrency in accordance with the remittance basis and who need to know how to report such gains in the future. It is always important to remember that HMRC guidance is not legislation and is open to challenge. 

Get in touch
Get in touch

If you have any concerns or have made cryptocurrency gains when claiming the remittance basis, your position should be reviewed by a professional tax advisor. For professional advice tailored to your unique circumstances, please fill out the form below and one of our specialists will be in touch to discuss your requirements and how we can help.

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