Most of us lead lives that are heavily digital. We think nothing of sending emails in our personal and professional lives, reading e-books and e-newspapers, taking and sharing digital pictures and videos, and meeting our family, friends and others on social media. Investing in cryptocurrency might seem a logical next step, but what is it, and what are the tax implications?

For the last decade and more, many people have invested in blockchain with a view to creating a global accountancy system for the ownership of possessions (both tangible and non-tangible). Cryptocurrencies, including Bitcoin, Ethereum and Ripple are a type of non-tangible asset. These currencies are digital in nature, are not formally issued by any central bank, and can be traded or used as payment globally.

Cryptocurrencies take a range of forms including:

• exchange tokens that can be used as payment for goods or services (similar to traditional currency);
• utility tokens that provide the owner with access to certain goods or services; and
• security tokens that provide the owner with security for a debt or provide the owner with profits from the security.

Legal questions arising

Cryptocurrencies have created problems from a legal perspective. It is unclear whether they are truly assets with value that can be owned, and if they are, whether they can be legally transferred to others, say, through a will or a prenuptial agreement.

If the owner of cryptocurrencies has a connection to more than one country or jurisdiction, it is not clear whose laws would govern the transfer of the cryptocurrencies and whose tax regime the currencies would be subject to.

In late December 2019, HMRC issued some guidance on its view of the law surrounding cryptocurrencies, focusing on exchange tokens.

The location of exchange tokens

Exchange tokens are considered to be situated for tax purposes in the jurisdiction in which the owner is resident. This may have a greater impact on those who are non-domiciled but resident in the UK (and paying tax on a remittance basis), as the cryptocurrencies are treated as being situated in the UK and will be subject to UK tax. See where is my domicile, if you are unsure.

Exchange tokens belonging to individuals who are not resident in the UK are not subject to the UK tax regime.

Tax treatment of exchange tokens for UK residents

Capital Gains Tax

HMRC’s view is that the majority of owners  considers that the majority of owners purchase or are given exchange tokens on an infrequent basis, wait for the value to go up, and then sell them. Profits made on exchange tokens are therefore subject to capital gains tax in the normal way, and a liability is incurred every time the exchange token is disposed of (ie sold, transferred to another, or used as payment) at a profit.

It’s important to keep records of the dates on which disposals are made (and the value of the exchange token on that date) to ensure that tax returns are accurate.

Income Tax

HMRC may tax gains made on exchange tokens as income for substantial traders of exchange tokens – and note that income tax rates are generally higher than capital gains tax rates.

Equally, if an individual receives exchange tokens (or any form of cryptocurrency) as a result of employment, then that will also be subject to income tax and national insurance contributions.

Inheritance tax

The value of cryptocurrencies owned by an individual is treated as forming part of the individual’s estate, and will be subject to inheritance tax on their death. Note again, the owner’s country of residence is an important factor in deciding whether the cryptocurrencies will be subject to UK inheritance tax.

Keep proper records

If you have cryptoassets, you need to keep records of the following when disposing of them:

• the type of cryptoasset;
• the date of the transaction;
• whether if they were bought or sold;
• the number of units;
• the value of the transaction in pounds sterling;
• the cumulative total of the investment units held; and
• bank statements and wallet addresses, if needed for an enquiry or review.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

• See also Do I need to declare my cryptocurrency to HMRC?

Joshua Ryan is a solicitor at Weightmans LLP, London