The location (or situs) of a crypto asset can be important for a number of reasons. If you are making a will, it can impact on the terms of that will. If you are non-domiciled taxpayer with profits on crypto assets, it can affect the tax treatment of those profits. So how do you know where your crypto asset is located?
In the recent case of Fetch.ai, which my colleagues have previously reported on, the issue of the location of digital cryptographic tokens like Bitcoin was once again considered. Adopting the conclusions reached by Butcher J in the case of Ion Science, Pelling J accepted that the situs of a cryptoasset is the place where the owner is “domiciled”. This is a different concept to “residence” (which is broadly where a taxpayer lives). “Domicile” is the jurisdiction with which you have the closest connection, and can have a major impact on the tax position of UK resident taxpayers.
HMRC has taken a different position to the courts on the location of cryptoassets, as set out in its manual which was published earlier this year. In HMRC’s view, the situs of cryptocurrency should be determined with reference to where the beneficial owner is resident because such an approach would provide “a clear, logical, predictable and objective rule which can be easily applied.”
The Society of Trust and Estates Practitioners (STEP) has now published its own guidance note on the topic which in some respects differs from HMRC’s approach. STEP suggests that:
- as cryptocurrency can only be dealt with using a private key, “its location should 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)”. Where the private key is controlled by a custodian or a trustee for example, one should consider the location of the controller in determining the situs of the cryptocurrency; and
- residence for the purposes of determining a cryptoasset’s location should be determined by applying common law rules, rather than the UK statutory residence test. The statutory residence test is used only to determine the residence of an individual for income and capital gains tax purposes, and “the location of an asset is a general common law concept and is relevant for purposes which go beyond taxation.” If the statutory residence test is to be used to determine the location of cryptoassets, STEP argues that this would need to be expressly provided for by statute.
So uncertainty on the question of the location of crypto assets remains, and given the amounts of tax potentially at stake, we can expect more litigation. Until there is more clarity on these issues, non-domiciled taxpayers should take advice on how to hold (and report on the profits of) crypto assets based on their personal circumstances.