While much of the focus around Bitcoin’s recent surge in value has been on lost keys and volatility, the emergence of cryptocurrencies over the last decade has posed a peculiar question for tax authorities around the world – where are they located for tax purposes?
HMRC’s answer is that the situs of Bitcoin matches the residence of the owner. This has potentially significant tax implications for UK resident, non-domiciled individuals (RNDs) who will have made substantial capital gains on their Bitcoin holdings in recent months.
Cryptocurrencies are a unique asset class that can be held in a multitude of ways, leading HMRC to dub them a “new type of intangible asset”. HMRC’s treatment of cryptocurrencies reflects their unique nature and has become increasingly relevant as Bitcoin’s value has increased by over 500% since the start of the Covid-19 pandemic.
HMRC’s guidance on the taxation of cryptoassets (most recently updated in December 2019) makes clear that “throughout the time an individual is UK resident, the exchange tokens they hold as beneficial owner will be located in the UK”. In other words, the situs of cryptocurrencies will match the residence of the owner for UK tax purposes.
Crucially, this prevents RNDs from claiming the remittance basis on any gains that have arisen on Bitcoin they own. The remittance basis allows RNDs to shelter foreign income and gains from UK tax, provided they are not brought (or “remitted”) to the UK and it is considered a very beneficial tax regime for RNDs. HMRC’s guidance effectively removes the right to claim the remittance basis on cryptocurrencies altogether.
RND Bitcoin owners should therefore be seeking advice on their UK tax liabilities if they are looking to "cash-in" on the recent surge in value – the guidance makes clear that Bitcoin owners will be making a disposal for capital gains tax (CGT) purposes if they:
- sell Bitcoin for legal tender (or “fiat currency”);
- exchange Bitcoin for a different type of cryptoasset;
- use Bitcoin to pay for goods or services; or
- gift Bitcoin to another person.
This all comes at a time when the UK Government is rumoured to be considering aligning CGT rates with (higher) income tax rates, or at least raise them from the current low rate of 20%, in order to help restore the deficit brought about by the UK’s response to the pandemic.
With 5 April fast approaching, non-UK domiciled Bitcoin owners who are thinking of becoming UK resident in 2021/22 ought to consider whether they should be undertaking pre-arrival planning so as to mitigate unwelcome UK CGT charges on any future disposals. If this opportunity is missed, changing the situs of cryptocurrencies after becoming UK resident will be challenging to achieve without triggering an immediate tax charge.