Status of Crypto Assets and Taxation of Crypto Currency
There have been two important developments in the ‘crypto’ world. HMRC has issued guidance on the taxation of crypto currency; and there has been a formal announcement that crypto assets are ‘property’ for the purposes of the law.
Crypto assets are property
Crypto assets are legally equivalent to property. A groundbreaking legal statement, published by the UK Jurisdiction Taskforce of the Lawtech Delivery Panel, states that crypto assets “have all of the indicia of property and are, therefore, to be treated as property” even though they are virtual and cannot be “physically possessed”. The statement follows a public consultation on the issues.
The statement adds that the novel or distinctive features possessed by some crypto assets (intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus) do not disqualify them from being property; nor are they disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action. Therefore, they are property for legal purposes.
The announcement was made by the Chancellor of the High Court, Sir Geoffrey Vos, who heads the Panel. He said the statement is intended to provide much needed market confidence, legal certainty and predictability - and paves the way for businesses to use digital assets on a blockchain.
However, Sir Vos acknowledge that the announcement will have far-reaching consequences affecting the treatment of crypto assets on insolvency and succession, and in cases of fraud, theft or breach of trust.
What about smart contracts? The statement also states that a smart contract is capable of satisfying the basic requirements of an English law legal contract as there is no reason why the normal rules should not apply, just because a potential contract is a smart contract
Taxation of crypto currency
HMRC has updated its guidelines on the taxation of crypto currency and makes it clear it does not consider any of the existing types of crypto currencies to be money or currency. Even so, it is still taxable - but how?
For the avoidance of doubt, crypto currency means tokens such as Bitcoin (HMRC says rules for utility or security tokens will be added in future).The guidance sets out HMRC’s approach to crypto currency transactions and issues such as what taxes apply and how tax returns are to be filed.
It says if a company or business is carrying out activities involving exchange tokens, they are liable to pay tax on them. Such activities include buying and selling exchange tokens, mining and providing goods or services in return for exchange tokens. The type of tax will depend on who is involved in the business and the business activities; and the amount will depend on its income, expenditure, profits and gains (which must be declared annually to HMRC).
Note that the calculation of taxable profits or losses must be in sterling; and businesses must keep full, accurate records of transactions including showing the valuation methodology applied. It is vital always to take specialist advice from tax and commercial lawyers familiar with advising on crypto currencies and crypto assets.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you