CryptoassetsAug 8 2022

Crypto is 'property' for IHT purposes

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Crypto is 'property' for IHT purposes
Photo: Dreamstime via Fotoware

In its latest updated guidance on the taxation of cryptoassets held by individuals, HMRC confirmed it would treat cryptoassets in the same way as it treats property for individuals who are domiciled or deemed domiciled for tax purposes.

But commentators have questioned the viability of this tax treatment, given that ownership of cryptoassets is not necessarily "tied to location" and regulators have "no agreement" on how to legislate.

Gregory Klumov, chief executive of Stasis, which issues euro-backed stablecoin, said: "Digital assets are treated as property only because global policymakers still have no agreement on how to legislatively segregate utility tokens and payment tokens, especially since one can morph into the other during its lifecycle."

This approach marks a departure from general common law principles and is unsupported by legal precedent or legislative authority.CMS 

He said: "Property has historically been tied to location and taxation has been easy. However, this is no longer the case after the advent of crypto.

"Your cryptocurrency property is yours until you remember your private key, regardless of your physical location. A simple solution could be to use stablecoins as an asset for pension contributions and the location of the issuing entity in property digestion."

The Revenue's guidance document on the taxation of crypto assets is ever-evolving as new policies develop and, with the Law Commission's recently published 549-page consultation for creating better rules around digital assets, commentators have welcomed the proposed clarity.

As reported by FTAdviser, the hope is these rules will set better tax and regulation around how crypto and digital assets are treated, with issuers calling for token classification.

This creates a two-tier tax economy, as the most popular stablecoins, such as USDC and EURS would be treated with tax relief as their issuers are located outside of the UK.

However, native blockchain tokens such as Bitcoin or Ethereum would continue to be fully taxed on inheritance and pension contributions unless HRMC introduces token classification, Klumov said.

Lack of legal precedent

The tax rules and other governances around crypto lack certainty and legal precedent - something which law firm CMS has pointed out in its latest updates.

The update's authors said that, in relation to IHT, there are no statutory rules to determine the situs or location of assets for inheritance tax purposes. Instead, the situs or location of assets is determined using general common law principles.

CMS stated: "In respect of exchange tokens specifically, where the cryptoassets are distinct from any underlying asset, HMRC has expressed its clear view on how situs should be determined.

Such contributions should attract the same income tax relief as a fiat money does.Renée Friedman, Exante

"HMRC’s guidance confirms that, in its view, the situs of an exchange token should be determined by reference to the tax residency status of its beneficial owner.

"But this approach marks a departure from general common law principles and is unsupported by legal precedent or legislative authority.

"It follows that should the question of the situs or location of exchange tokens be put before the courts, it may well be answered differently."

CMS also said it was unclear how the situs or location of other types of cryptoassets will be determined.

Pension question

There are also questions on how cryptoassets should be treated when part of a pension portfolio. 

Currently, subject to certain limits, income tax relief is available to members in respect of member contributions paid to registered pension schemes.

Therefore, according to CMS: "On the basis that HMRC does not consider cryptoassets to be currency or money, should cryptoassets be paid into a registered pension scheme, such contributions would not attract any income tax relief.

Fintech specialist Exante's editor-in-chief Renée Friedman explained: "If an individual nevertheless contributes cryptoassets into a registered pension scheme, albeit without any income tax advantages, such cryptoassets would become part of the scheme assets which are subject to the tax rules governing registered pension schemes."

For Friedman, the Bank of England certainly needs to provide greater clarity and certainty on what it considers to be legal tender. 

Friedman said: "If the Bank of England does consider cryptocurrencies as legal tender, and not just intangible assets, then that should be considered in terms of inheritance with the same rules applying as if someone inherited foreign currency assets."

According to Exante, this could lead to more clarity on tax and the treatment of crypto for IHT and pension purposes. 

Friedman explained: "If cryptocurrencies are recognised as legal tender by the BoE, there should be no difference in how that pension contribution is treated in terms of tax relief.

"There is also, of course, the issue of central bank digital currencies, which will be/are central bank issued therefore should be recognised as money.

"If payment into a pension scheme were made via central bank digital currencies, then there should be no difference in how that contribution is treated in terms of tax relief - such contributions should attract the same income tax relief as a fiat money does."

simoney.kyriakou@ft.com