Ben Rosen, Partner
Do you own or want to acquire a cryptoasset?
If you have bought into cryptocurrencies or NFTs or are considering such an adventure, then you may know that this brave new world is awash with both risk and reward. Current volatility and market fear aside, the market capitalisation of all cryptoassets is valued at approximately $2 trillion. It all began with the anonymous and aptly cryptic Satoshi Nakamoto and the publication of ‘his’ bitcoin white paper on 31 October 2008. In the midst of and in reaction to the failure of the modern centralised banking system, the white paper provided the spark for an explosion in the adoption of blockchain technology, on which other cryptocurrencies and decentralised finance are built. Bitcoin stirred up a seismic shift not just in how finance could operate but how society and its digital counterpart could transform for the better and replace the systems of old.
The pandemic certainly played its part; several lockdowns, working from home and furlough schemes later and recreational investors have become more immersed in the virtual world than ever. 2021 has witnessed the astronomical growth of this technology in value terms, with terms like NFTs and the Metaverse fixtures of the new vernacular. For some a bubble and for many a revolution, the underlying technology, the blockchain, heralds a revolutionary overhaul to the way we transact, contract and hold wealth.
The uninitiated might ask: how exactly does one ‘hold’ this wealth? Can we, in fact, call it wealth, where paper gains are susceptible to daily volatility and wealth is not true wealth until realised into fiat currency? Transacting with some cryptocurrencies may obviate the need for centralised banking, but the term cryptocurrency is arguably a misnomer. Institutions remain reluctant to accept these tokens as currency, and are uncertain as to whether they are assets when they could, in value terms, either implode or explode from moment to moment. Without institutional adoption, the asset class remains vulnerable to the whims of the market and no whimsical asset can reasonably be called a ‘store of value’ as it is often called and nor a reliable form of currency.
Some key tax issues and dangers
Amidst the promise and hype is, as the saying goes, the inexorable certainty of tax. Where there is value (wealth), tax authorities are lurking and ever more so in the context of a generation defining level of pandemic induced debt.
Where legislation is unsurprisingly agnostic on the topic, we look to HMRC and, according to their extensive guidance, put simply, cryptoassets are not currency or another form of money. Instead, cryptoassets “are cryptographically secured digital representations of value or contractual rights”. That may be so, but how are they taxed?
Some noteworthy highlights include the following:
- CGT is due on disposal where a gain has arisen on cryptoassets (although what comprises a cryptoasset is liable to change in the eyes of HMRC);
- Where a taxpayer is considered to be trading (buying and selling on an ongoing basis), profits are treated as income and so subject to income tax at a higher rate than CGT; and
- Cryptoassets are situated in the taxpayer’s jurisdiction of residence, which has huge implications for UK resident non-domiciled individuals holding cryptoassets on non-UK exchanges.
The guidance is far from conclusive and nothing is yet enshrined in legislation. We can expect the legislation to somewhat reflect the highlights above, but how much further will it go? Interpreting legislation is one thing, but guessing tax policy and law on an entirely new asset class is beyond any practitioner at this stage.
The future clarification to the tax on cryptoassets
Once the Covid debt rears its head in full, the Government may well decide to tax unrealised gains in the form of a much-feared wealth tax. How this will work in practice is anyone’s guess. How and when are the assets valued? If the tax is evaluated on the basis of cryptoassets at a fixed date and the market tanks, where does this leave a proposed tax on unrealised gains? On the issue of both lifetime and succession planning, how are these assets valued for inheritance tax in creating lifetime holding structures or when passed by Will?
There are innumerable practical issues for participants in the digital asset world. In an increasingly digitised world, passwords are practically as valuable as the assets that they protect. Cryptoassets are now commonly stored in a digital wallet, which can be stored online or on external hard drives. Storage and security are of paramount importance to the question of value. Without the key, the treasure trove is locked and wealth is inaccessible. In the case of cryptoassets, the value would be irretrievably lost in the event of death. It follows, however, that irretrievable cryptoassets cannot confer financial benefit but nor can they attract IHT on death, as there is no value or benefit to be passed on.
How can we assist?
Quastels is delighted to offer a service to clients that focuses on the interplay between wealth and technology, combining our experience of private wealth and asset structuring with in-depth knowledge of the digital landscape. We are well placed to guide you through the tax regime relating to cryptoassets and would be delighted to advise further.
This article does not constitute legal or tax advice and may not be appropriate to your individual circumstances.