The Society of Trust and Estate Practitioners (STEP) have published their view as to how the location of cryptocurrencies should be determined. Notably, their analysis differs from HMRC's published guidance.
What is a cryptocurrency?
For the uninitiated, cryptocurrencies are entries on a digital ledger, with that ledger shared and saved on multiple servers around the world. They are usually accessed by using a "digital key" which permits a person to deal with their holding of that currency. Perhaps no wonder there is debate about where cryptocurrency deposits are located for tax purposes given that the system is decentralised by design.
Well-known names of some cryptocurrencies include Bitcoin, Dogecoin, and Ethereum.
Why does it matter where it is?
For a non-domiciled individual, the location of a cryptocurrency will affect whether any gains are subject to UK capital gains tax and if the holdings is excluded property for inheritance tax purposes.
What does HMRC say?
In their guidance (CRYPTO22600), HMRC say that their view is that the correct approach to determine the location of the cryptocurrency would be to look at the location of the beneficial owner:
"Using the residency of the beneficial owner of the exchange tokens to determine the location gives a clear, logical, predictable and objective rule which can be easily applied. This means that a person who holds exchanges tokens is liable to pay UK tax if they are a UK resident ... and carry out a transaction with their tokens which is subject to UK tax."
What does STEP say?
In contrast, STEP have reviewed the work of Professor Andrew Dickinson who emphasises the importance of the 'private key' and the person who has that having the "control, ability to deal and, by extension, enforceability".
"In the case of cryptocurrency, it can only be dealt with by the use of the private key and, arguably, its location should therefore be linked to the location of the private key or of the person who has control of the private key (who may or may not be the beneficial owner)."
So a cryptocurrency with a 'key' held by a nominee, trustee, or cryptocurrency exchange, would be located wherever that nominee, trustee, or exchange was.
Residence in these circumstances, STEP argue, should be based on the common law basis rather than the Statutory Residence Test.
There are nuances to this position (such as direct nominees for non-pooled holdings where a beneficiary would have the right to call for the transfer of the holding to them or jointly held cryptocurrencies) and these benefit from careful reading.
Given their alternate view, STEP caution that a white-space disclosure may be appropriate where a taxpayer takes a filing position different to HMRC's guidance.
If you would like to speak with us about the STEP note, HMRC guidance on this, or specifically on the likely treatment of any cryptocurrencies that you own, please do get in touch.
The residence of the beneficial owner will be irrelevant assuming the beneficial owner is not the holder of the public address with which the relevant units of the cryptocurrency are associated and is not the holder of the private key that allows transactions in respect of those units to be authorised.