Q&A: Tilney Smith & Williamson on tax and cryptoassets

Nearly a quarter of a century on from its inception, cryptocurrency and blockchain technology has long surpassed its initial ‘next big thing’ status. For many, this is an asset class with the potential to challenge the very foundations of our social and political system.

However, controversy and mystique still often dominate the dialogue around this space, and this is no different when it comes to the nebulous subject of taxation. Rapidly increasing demand for digital currencies offers the accounting sector a golden opportunity, but unregulated exchanges and a glaring lack of official legislation mean that the threat of fraudulent activity looms large.

For James Carn, associate director of tax at Tilney Smith & Williamson, mounting popularity means that understanding the taxation of cryptoassets must be a key focus for advisers. Speaking to Accountancy Age, Carn offers an overview of why accountants must accept that digital currency “is no longer a niche activity”, and what key stakeholders can do to improve the landscape in future.



Can you summarise how the taxation of cryptoassets currently works in the UK?

Before HMRC had issued guidance on the topic, there were arguments put forward that cryptoassets should be treated in the same way as traditional currency, or that profits realised on the sale of cryptoassets should be treated as gambling returns. If either of these treatments were to apply then profits made from buying and selling cryptoassets would not be taxable.

HMRC took a different view and have now clearly set out that cryptoassets are treated as investments, in most cases within the scope of the capital gains tax regime.

A taxpayer is treated as making a disposal of a cryptoasset on any occasion during which they cease to have beneficial ownership of the asset. That means a disposal might occur when a cryptoasset is exchanged for fiat currency, for another cryptoasset or when used to buy goods or services. Taxpayers who stake their cryptoassets should also be aware that HMRC has also recently updated their guidance to say that, in some circumstances, there can be a disposal where an asset is transferred to a borrower or DeFi lending platform.

Generally, capital gains on cryptoasset disposals are calculated in a similar way to capital gains on shares. In particular, the ‘same day and next 30 day’ matching rules that apply on share disposals also apply to cryptoassets. Investors, therefore, need to keep adequate records so that purchases and sales can be matched correctly.

In some rare cases, profits might fall within the scope of income tax if an individual is deemed to be trading in cryptoassets or engaged in mining activities. The tests to determine whether or not an individual is deemed to be ‘trading’ in an asset are complex and are based on the interaction of a number of factors, including the source of financing, the frequency of transactions, the method of acquisition and the interval of time between the purchase and sale of the asset. Trading losses can be offset against other income which is more attractive than the capital loss treatment. HMRC is, however, likely to challenge a taxpayer who reports a cryptoasset related loss as a trading loss.

If an employee is paid by their employer in cryptoassets then the assets count as ‘money’s worth’ and are subject to income tax and national insurance contributions. If the asset is a ‘readily convertible asset’ (RCA) then an employer with a UK tax presence must operate PAYE to withhold income tax and class 1 national insurance contributions from the payment via the payroll. In HMRC’s view, cryptoassets are RCAs if they can be exchanged for fiat currency or other cryptoassets on one or more exchanges.

Any subsequent disposal of the cryptoasset might then result in a chargeable capital gain or an allowable loss on the increase or decrease in value between receipt and sale.

What can firms do to get up to speed with the taxation of cryptoassets?

HMRC has not issued specific legislation to deal with cryptoassets but has tried to apply existing legislation to tax transactions. HMRC has published very useful guidance and also released a dedicated cryptoasset manual, which has involved a fair amount of consultation with tax professionals. This is a very helpful source for advisers and gives clear guidance regarding HMRC’s position.

This is a fast-moving space and accordingly, there is a crypto community that is developing. Individuals and firms should take the time to ensure they engage with this community, both through reading various thought pieces, especially those issued by founders, and also by bringing their own opinions and views to the table.

How important is it for them to do so?

Having a strong awareness of the tax treatment of cryptoassets is crucial for firms as investing in cryptoassets is no longer a niche activity. A few years ago, clients with cryptoassets were relatively rare, and cryptoasset investments were often the main activity of those clients. Because cryptoasset investing has become far more accessible, due to user-friendly platforms such as Coinbase, Binance, EToro and even Paypal, a wider cross-section of clients now invest in the space and advisers need to be fully aware of this.

There is still a significant amount of confusion and misconception amongst investors regarding the extent to which investment returns are taxable and how they are taxed, so clients will increasingly look to their advisers for guidance. In particular, taxpayers will look to their advisers for assistance with pooling and other record-keeping as this can prove particularly onerous.

To what extent is the onus on the taxpayer in this situation?

Whilst employing a reputable tax adviser can help to demonstrate that a taxpayer has taken reasonable care with their affairs when negotiating penalties, for instance, it is always the taxpayer’s responsibility to ensure that their tax returns and reporting to HMRC are correct.

The sudden growth in value of cryptoassets, particularly in late 2017 and early 2021, is likely to have resulted in a significant number of investors becoming subject to tax and these investors may not have otherwise needed to file tax returns.

One point that taxpayers might not be aware of concerns the location, or situs, of cryptoassets. This point is particularly relevant to non-UK domiciled individuals who may be able to use the remittance basis and for related inheritance tax purposes.

HMRC has determined that the situs of the assets follows the residence of the beneficial owner. As a result, HMRC considers that cryptoassets held by a UK resident individual are situated in the UK. If this is the case then a person will be liable to UK tax if they are a UK resident and carry out a taxable transaction with their tokens. This view could also mean that cryptoasset holdings may give an inheritance tax exposure for non-UK domiciled individuals living in the UK. Furthermore, any new purchases could give rise to taxable remittances.

Whilst this is HMRC’s view, it is not necessarily supported by existing case law or legislation, given the very different nature of cryptoassets. It also contrasts with the views held by tax authorities in other jurisdictions.

What role does the government play in this, and what more can they do?

The government has accepted that cryptoassets and blockchain technology has the potential to deliver real benefits to financial services and capital markets.

The joint HM Treasury-Financial Conduct Authority-Bank of England Taskforce report published in 2018 set out an ambitious approach to integrate cryptoassets into existing financial markets, whilst being clear on the need to regulate the market to protect consumers. The government has already sought to bring wallet and exchange providers within the scope of anti-money laundering regulation and has been active in restricting the sale of certain cryptoasset related derivatives to consumers and providing guidance to protect consumers against cryptoasset related fraud.

Some individuals may be vulnerable to certain cryptoasset scams, as most consumers have heard of the fantastic returns that other investors have achieved. Consumers may also inadvertently take more risk with cryptoasset related investments than they may have done with more traditional investments, so the government’s decision to regulate the market is understandable

HMRC should also continue to maintain and update its help sheets and guidance to assist taxpayers, whilst also continuing its dialogue with advisers so they are well placed to assist their clients.

What role do crypto exchanges and platforms play, and what more can they do?

Crypto platforms are increasingly delivering educational materials to investors, which is particularly welcome as a broader range of investors enters the market. Clearly, security is crucial for both platforms and exchanges, but so is the need to safeguard investors by ensuring that the risk nature of certain products, such as CFDs and other leveraged investments, are fully understood.

It would be outside the remit of platforms to provide tax advice, as such. After all, conventional investment firms typically make the caveat that investors are responsible for making correct reports to tax authorities and that investors should take professional advice where there is uncertainty.

That being said, taxpayers increasingly depend on platforms to provide reliable reporting in a format that allows them to complete their tax returns accurately. Platforms will likely be required by HMRC to share data and investors will therefore expect platforms to provide them with the necessary tools and information to be compliant. One of the more complex, and therefore costly aspects of taxing cryptoassets is in managing and condensing data. Platforms would add significant value to clients by providing accurate income and capital gains tax reports, as would be expected from a UK investment house.

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