In this article we examine the HMRC guidance regarding the location of cryptocurrencies for UK 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. However, as with any relatively new asset, it’s not obvious in advance how gains on their sale are taxable. HMRC has 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 in most cases exempt from UK tax, it’s commonly agreed that cryptocurrency is an intangible asset and that gains on its disposal are subject to Capital Gains Tax (CGT). However, the question of where cryptocurrency is located for CGT purposes has not been addressed in the legislation and we’ve seen only limited Tribunal cases commenting on the position.

The importance of location and how it determines tax liability

The location of an asset is primarily important for UK residents but also for non-UK domiciled individuals who elect for the remittance basis. For such persons, gains on UK-situated assets are subject to CGT on an arising basis 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's 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 for CGT it’s primarily determined by legislation (with the application of such legislation sometimes tested in cases).

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. HMRC have a Cryptoassets Manual, which at the time of writing was last updated in August 2023. While the manual is helpful in setting out the broad tax principles underpinning cryptocurrency, there have been no developments in 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.

HMRC continues to issue nudge letters to UK taxpayers as reminders to those who invest or trade in cryptoassets, to ensure that are paying any tax due. If you’ve already been investing or trading in crypto, you should urgently review your tax position before you receive one of the nudge letters, as you may be at risk of receiving a HMRC enquiry into your tax affairs.

Response from the tax profession

The reaction from the tax profession was critical of the guidance, on the grounds that HMRC has 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.

We’ve already seen evidence of HMRC applying its new guidance to real cases. There have been a couple of tax cases in support of HMRC’s position (i.e. that cryptoassets are located where an individual is resident) but the decisions are not yet final and so this analysis could change.

There will still be an element of 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’s important to remember that HMRC guidance is not legislation and is open to challenge.

You might also be interested in: Cryptocurrency. Some need to knows.

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For professional advice on making cryptocurrency gains when claiming the remittance basis, and to ensure you’ve paid the correct UK tax in light of the nudge letters from HMRC, fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help.