HMRC has recently published updated guidance on the tax treatment of crypto assets. In this instance, it focuses on determining their legal location. As a result these new HMRC rules for location of crypto will affect potentially thousands of UK taxpayers
Overview
Because Crypto is digital in nature, this means that it does not have a convention physical location - for example like a bank account. Therefore HMRC regard it necessary to determine crypto's location (often referred to as ‘situs’) for tax purposes. This is particularly relevant for those individuals who may be UK resident, though non-UK domiciled for tax purposes.
Why does location of crypto assets matter?
The location of crypto ultimately determines which tax rules apply. HMRC's latest published guidance details two different approaches that HMRC use when determining the location of crypto.
Where there is an underlying asset
Where crypto is merely a digital representation of an underlying asset then the location of the underlying asset determines the location of crypto.
HMRC provide an example of where a company buys and sells gold bullion on behalf of clients and issues a crypto token representing the beneficial interest in one gold bar. T
The token is a digital representation of the gold bar. Therefore, HMRC determines it location by reference to the location of the gold bar itself.
Furthermore, it's possible for crypto to be a digital representation of another intangible asset. For example such as a debt. Therefore, the relevant rule for determining the location of the underlying asset determines the location of the crypto. In this case the residence of the debtor.
Where there is no underlying asset
Where crypto is an asset not connected with any underlying asset then HMRC’s opinion is that none of the statutory location rules apply. Instead it is HMRC’s view that:
Where crypto is an asset not connected with any underlying asset then HMRC’s opinion is that none of the statutory location rules apply. Instead it is HMRC’s view that: the only identifiable party to consider is the beneficial owner of the crypto,.
As a result the location of the crypto will be determined by the tax residency of the beneficial owner, regardless of their domicile status.
Furthermore If crypto is jointly owned, then the location will be determined by each beneficial owner's residence status. If one or more of the co-owners are UK resident, this will not affect the location for those co-owners who are not UK residents.
Summary
We've already mentioned previously that HMRC are seeking to tighten the net as they believe that there are a number of crypto transactions that continue to remain undisclosed to HMRC.
These new rules could have ramifications for those UK resident and non-domiciled individuals who have undertaken crypto asset transactions both post and pre-arrival in the UK. Alternatively, they could be individuals claiming to be non-UK tax resident under the Statutory Residence Test.
In some cases it may be necessary to consider whether a voluntary disclosure of historic crypto transaction to HMRC is required.
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