Cryptoassets and capital gains tax: a nudge from HMRC
The letter informs recipients that disposals of cryptoassets may give rise to capital gains tax liabilities.
It explains that disposals of cryptoassets include:
- Selling them for sterling or other ‘fiat’ currencies;
- Using them to purchase goods and services;
- Gifting them;
- Exchanging them for other cryptoassets.
The last example, exchanging one cryptoassets for another, is particularly important.
There remains a widespread misconception that a gain or a loss only arises when funds are withdrawn from an exchange. This is not the case. Each exchange of one cryptoasset for another gives rise to a potential gain or loss. If the taxpayer’s net gains exceed the annual exemption, or if the proceeds received in a year are in excess of four times the annual exemption, then the disposals must be reported to HMRC on the taxpayer’s self-assessment tax return.
Aren’t holdings of cryptoasset anonymous? How has HMRC identified holders of the assets?
HMRC’s nudge letters are based on information obtained from UK-based exchanges including Coinbase under a ‘data holder notice’.
Coinbase shared their information with HMRC on all its customers with UK addresses who received more than £5,000 of cryptoassets into their Coinbase account in the 2019/20 tax year. Other exchanges may have shared similar information.
What about UK residents that have their permanent home outside of the UK?
Non-domiciled residents or ‘non doms’ potentially benefit from the remittance basis of taxation. This means that if they make an election, they are only chargeable to UK taxation if they bring the overseas income and gains to the UK. If the income and gains remain overseas, they are outside the scope of UK taxation.
However, HMRC’s published view is that the ‘situs’ of a cryptoasset follows the residence of the owner. Therefore, if a taxpayer is non-UK domiciled, but a UK resident, HMRC consider his or her cryptoassets as situated in the UK. Any gains arising on the disposal of such assets will not therefore be sheltered by an election for the remittance basis.
Additionally, HMRC’s view means cryptoasset purchases by a UK resident non-dom from their overseas income and gains will have triggered a taxable remittance at that point. As this view was not published until late 2019 there are potential arguments around purchases before this time.
HMRC’s view of situs appears to be a relatively simple and a pragmatic one. It is not based on law and there are other views on the situs of cryptoassets by respected professional institutes and academics which appear to be based on a deeper analysis. However, if a taxpayer wishes to file on the basis that their cryptoassets are non-UK situs, they should consider an appropriate disclosure in the relevant self-assessment tax return. They should also expect an HMRC enquiry to follow.
ICAEW correspondence with HMRC suggests that the nudge letters have not been issued to non-dom taxpayers. However, HMRC has not signalled a change in its position on the situs of cryptoassets. In our view, as nudge letters appear to have not been issued to non-doms, it is unlikely to alter HMRC’s stance if they discover transactions in cryptoassets later. It also doesn’t remove the obligation for non-doms to consider their own tax position now on an unprompted basis.
The letter refers to capital gains tax. Are there income tax implications?
While HMRC’s nudge letter is focused on capital gains tax, there are other tax implications of acquiring, holding and disposing of cryptoassets.
For example, cryptoassets received through mining, staking and yield farming will be subject to income tax. Either as the income of a trade or as miscellaneous income. Airdropped tokens, typically received as part of an advertising or marketing campaign, will also be subject to income tax. Especially if they are received in return for, or in expectation of, a service.
Cryptoassets received as remuneration are taxable as employment income. Employers will also have certain compliance obligations including the operation of PAYE and the collection of National Insurance Contributions. Clearly, this aspect will have its own particular challenges.
Cryptoassets will form part of the holder’s estate for inheritance tax purposes and therefore to the extent that their value, and the value of other assets, exceed the nil rate band, they will be liable to inheritance tax on the holder’s death.
Do I need to do anything in response to HMRC’s letter?
Recipients do not need to respond to HMRC’s letter. Unlike other nudge campaigns, HMRC has not requested a response. However, we strongly recommend that clients should review their positions to consider whether they need to amend their returns or to make a disclosure to HMRC. There is no specific disclosure opportunity focused on cryptoassets, but the Digital Disclosure Service can be used. However, if there is any deliberate behaviour, then particular care is required and it may be more appropriate to consider a disclosure under the Contractual Disclosure Facility which, if accepted, offers immunity from criminal prosecution in return for the payment of tax, penalties and interest.
If you would like to discuss the tax implications of cryptoassets for you or your clients, please contact us.