Globally Speaking | September 27, 2022

An Update Regarding Digital Assets

Market crashes, bankruptcy filings, government reforms and lawsuits on the blockchain: the world of digital assets seems to change faster each day. Its relationship with the UK tax system is no different. Whilst no-one can predict where their future ultimately lies, digital assets are more relevant than ever to clients and advisers today.

Taking different profiles of clients and their advisers, in this article we set out some highlights and recent updates.

Non-UK clients

Generally, a client will need to consider their liability to capital gains tax when they sell or gift tokens, exchange one token for another or even if they pay with them. If the client is a non-UK domiciled individual or a non-UK resident, however, the position may change if the token is located outside the UK for tax purposes. Views on this question differ and the law is not settled. HMRC’s stated view is that a token is where the beneficial owner is tax resident.

Over recent years, a series of non-tax cases have touched on this. These decisions are not binding, but suggest that the domicile of the owner might be relevant. There are other possible views, on which we can advise, if applicable.

Clients with tokens on insolvent platforms

Clients may have tokens held on a platform which has fallen insolvent, such as Celsius or Nori. The UK government is currently consulting with the public for their thoughts on how this process should be managed.

Trustees and corporate service providers

As with any structure, tax advice should be taken before the setup stage. This is particularly pertinent for structures with digital assets.

If a business is being transferred or restructured, has the intellectual property been considered?

If the settlor wants to lend cryptocurrency, has capital gains tax been considered? This can seem counterintuitive as most practitioners will have come across loans of cash that are exempt.

The UK government is currently consulting on whether to reform the tax law around crypto lending. One can easily see how removing this unexpected tax charge might facilitate investment and innovation.

Another consultation is underway regarding how stablecoins should be regulated. This may affect professional service providers managing structures with these assets. Checks and balances might be introduced to prevent a repeat of recent crashes, such as depegging events in algorithmic stablecoins. Precedent for this can be found in the banking sector in the aftermath of the 2008 financial crisis.

Privacy-conscious clients

Some advocates of crypto value privacy. The ability for transactions to be carried out on the blockchain, in theory, leads to the possibility to do away with central intermediaries, such as banks and potentially governments.

However, government intervention has started to develop. Government consultations are on the increase, such as those discussed above. As revealed by a recent freedom of information request, HMRC used their powers to obtain bulk data from exchanges relating to transactions from 2017 to 2020. In November 2021, HMRC sent “nudge letters” to those they had identified as holding digital assets, reminding them to file tax returns if required.  

Conclusion

The crypto landscape is evolving at speed, in both commercial and tax terms. Clients will indeed usually know much more than their advisers about commercial changes in the digital assets space. That said, tax and structuring advice can avoid being caught out by legal changes.