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Cryptoassets and taxation

Posted on: October 11th, 2023 by AlexT

For UK traders, investors and businesses dealing with crypto assets, it is important to understand the complex tax implications for this rapidly evolving sector. For many industry participants, the line between fact and fiction regarding the taxation of crypto assets is blurred, often leading to confusion.

Having clarity and understanding on the UK’s approach to the taxation of crypto assets is therefore vital for individuals and businesses to better plan their transactions and strategy, thereby optimising their tax burden.

The tax treatment of Crypto assets in the UK

The UK’s tax authority, HMRC, recognises that there are a number of different types of crypto assets, and have adopted a taxonomy that aligns closely with the FCA’s regulatory position. However, the tax treatment of crypto assets is dependent on the nature and use of the assets in question, as opposed to their classification.

To put to rest a common misconception, HMRC does not consider the buying and selling of crypto assets to be comparable to gambling. Whether a transaction can be properly characterised as gambling will be a question of fact and will instead be considered on a case-by-case basis.

Importantly, HMRC does not consider crypto assets to be currency, and therefore treats them as a traditional asset for tax purposes. Consequentially, profits made from crypto asset activities are taxable.

What taxes are applicable?

For individuals dealing with crypto assets, the two main types of tax applicable would be Capital Gains Tax (CGT) and Income Tax.

Capital Gains Tax

Capital Gains Tax is essentially a tax on the profit made when an asset that has increased in value has been sold or disposed. It is the gain that is made which tax is applied against, rather than the whole amount that it has been sold for. For example, if you bought Bitcoin at £16,000, and later sold for £25,000, the gain on which tax would be applied would be £9,000.

Disposal of crypto assets does not just include selling the crypto asset for fiat, but also trading it for another crypto asset, spending it on goods or services, or gifting it.

There is also an annual tax-free allowance, for such instances. For the 22/23 tax year, this allowance is £12,300, and for 23/24 it is £6,000. This means that gains up to the amount of the annual allowance are not subject to any CGT.

If the profits exceed this amount, then CGT will be payable on the amount above the tax-free allowance, with the rate payable depending on your taxable income.

Income tax

In some instances, crypto assets, and activities relating to them, can be treated as income in nature; for example, payment for services with crypto assets, receiving crypto assets as employee remuneration, or earning crypto assets from mining or staking activities.

In other circumstances, trading crypto assets may also be subject to income tax, especially if the trading activity is particularly frequent and regular. Again, whether an individual’s trading activity would constitute treatment as income for taxation purposes will be highly fact dependent and assessed on a case-by-case basis.

Crypto assets received by an airdrop might also be liable for income tax if the individual has taken an action in exchange for the airdrop, for example promoting or moderating the socials for a particular project.

In relation to mining or staking taxes, if the activity is professional in nature profits may be subject to income tax under trading income rules. If the activity is more casual, it would likely be subject to income tax as miscellaneous income.

If crypto assets are mined, then the amount of tax will be based on the value of the crypto asset at the time it was mined. If the mined crypto asset is later sold and its value has increased, there may also be CGT applicable on the profit made from the increase in value.

The rate of income tax payable would be dependent on the individual’s income for the particular tax year.

It is therefore important to keep detailed records of crypto asset transactions, as it is possible to reduce the gain, and therefore the tax burden, by deducting allowable costs such as transaction fees.

Cryptoasset tax treatment and businesses

For businesses engaged in crypto asset activity, the tax treatment would depend on the nature of activities and transactions. A business involved in crypto asset activity may be liable to pay a number of different taxes such as CGT, Corporation Tax, Income Tax, VAT, and Digital Services Tax. For example, if a business’s primary function is the trading of crypto assets, then profit and losses will be subject to corporation tax at the applicable rate.

The tax treatment of businesses will depend on the particular facts of its activities, and will take into account a range of factors.

Lost crypto assets

If the private key to a crypto asset wallet is lost, HMRC does not view this as a disposal of the asset. Whilst you may have lost access to the crypto assets within the wallet, you still technically own the assets.

However, in situations where there’s no realistic chance of recovering the crypto assets, it may be possible to file a negligible value claim and seek relief for a capital loss.

Gifts

Gifting crypto assets is viewed by HMRC as a disposal, and therefore will attract a tax liability in the form of CGT. In other words, you would be subject to CGT on the difference between what you originally paid for the crypto asset and its market value at the time it was gifted.

However, there are advantageous carve-outs when it comes to gifting crypto assets to your spouse or civil partner, as transfers between spouses/civil partners are not usually subject to CGT at the time of the gift.

Rather, the recipient takes on the original cost basis and will then be liable for any CGT if they later sell or dispose of the crypto assets.

Conclusion

Taxation and crypto assets can be a complex and nuanced area, with many considerations, and failure to report crypto gains or losses could lead to penalties and interest charges on unpaid tax liabilities.

It is therefore important to note that, although the nature of cryptoassets and the decentralised framework in which they operate allows for pseudonymity, HMRC has invested significant time and effort to ensure cryptoasset tax compliance.

HMRC has been known to request customer information from centralised exchanges, and also utilises technology and analytics to analyse data and transactions which can establish connections between cryptoasset wallets and transactions and the individuals behind them. 

With this in mind, it is imperative that individuals engaged in the crypto sector seek professional advice to ensure that tax liability is calculated correctly and is optimised in line with their strategy and objectives.

Mohit Pasricha comments on legal challenges to refereeing decisions in the Evening Standard

Posted on: October 5th, 2023 by AlexT

In light of Liverpool FC looking to challenge a controversial VAR decision, following a game against Tottenham Hotspur, Director and Head of Sports & Entertainment Mohit Pasricha comments on potential legal options for the club.

Mohit’s comments were published in the Evening Standard, 5 October 2023, and can be found here.

“Whilst the PGMOL have admitted a significant error occurred, Liverpool are ultimately facing an uphill battle to succeed in any legal claim.

Any case would need to establish whether human error directly affected the outcome of the game (which is not evident) or potentially Liverpool’s final position at the end of the season (which cannot be determined now).

Allowing a successful claim based on human error could set a dangerous precedent and potentially open the floodgates for other clubs to make similar challenges, making it highly improbable for any such claim to prevail.”

Using crypto assets to purchase property

Posted on: September 27th, 2023 by AlexT

With the increasing adoption of crypto assets, it is inevitable that we will see a rise in interactions between this sector and more traditional asset markets, such as real estate.

An increased awareness of crypto assets, and their growing availability over the past decade have presented both individuals and enterprises with access to a risk-on environment, characterised by high risk and reward profiles. Consequently, numerous investors have experienced significant returns on their initial, sometimes modest, investments. One notable trend we have observed is the convergence of crypto wealth with the traditional real estate market, particularly in the form of crypto gains being utilised towards real estate acquisitions.

There are primarily two methods by which individuals and businesses are using crypto wealth to enter the real estate market.

The first and most common approach involves utilising the fiat proceeds from crypto gains to cover part or the whole cost of a property purchase. This approach aligns closely with established conveyancing practices.

The second approach entails the direct use of the crypto assets themselves to facilitate the property purchase. The property’s purchase price, whilst still being pegged to a fiat value, is not settled in fiat currency but rather in an agreed-upon amount of specified crypto assets.

Both approaches have their own complexities and advantages, including risk tolerance, market conditions and legal considerations.

 

Using fiat proceeds of crypto assets

The approach of using fiat proceed of crypto gains in property purchases is a method which strongly resembles established conveyance process, albeit with some nuances in the process brought on by additional financial planning and legal considerations. This is by far the most common method by which parties are utilising cryptoassets in order to purchase property.

Generally, the process will involve several key considerations.

Conversion to fiat

The first step of this process is to convert crypto assets comprising part or the entirety of a crypto assets portfolio into a fiat currency, as the British Pound Sterling.

This will usually occur through a centralised exchange and, given the volatility of the crypto markets, timing may be an important consideration.

Parties will often aim to convert their crypto assets at a peak value, so as to maximise the return into fiat. If substantial sums are being converted and off-ramped, then it is likely that it will be done in tranches and using multiple centralised exchanges to get the best rates and mitigate slippage.

It is also possible to convert cryptocurrencies into fiat currencies using OTC trades, facilitated by a specialised broker.

Banking considerations

Whilst banks and other financial institutions are undoubtedly more familiar with crypto assets than they were several years ago, it is still important to note that not all financial institutions are crypto friendly.

As such, when off-ramping substantial sums from an exchange to a bank account, it is vital to consider whether the bank in question is willing to accept the funds into the account, and buyers must be prepared for the bank to make enquiries about the source of funds in line with standard anti-money laundering and know-your-customer requirements.

Legal and tax implications

A conversion between crypto assets (e.g. Bitcoin to USDC) or a conversion from crypto assets into fiat is also likely trigger a tax liability, and crypto investors may be subject to capital gains tax or income tax, depending on the nature of the activity.

Solicitors assisting with the purchase of  property in such cases will be aware that they will be taking these fiat funds into their account in furtherance of the purchase. As such, they will have a responsibility to determine that these fiat proceeds of crypto assets activity is genuine and not illicit funds or an attempt to launder money.

In other words, the solicitor must be able to verify the source of funds – a key consideration  due to the sector specific knowledge that this requires. Before instructing solicitors with the conveyance of the intended property, potential buyers should ensure they are comfortable and able to verify source of funds coming by way of  crypto assets.

At Lawrence Stephens, our dedicated crypto asset and blockchain team within the firm works closely with our conveyancing department to be able to review and verify source of funds deriving from crypto assets activity seamlessly.

Application of the funds

Depending on how fiat funds are intended to be applied, if a cash amount is being used to cover the entire cost of the property, then standard conveyancing procedures will apply to the rest of this process.

However, if funds are intended to be used as a partial deposit, with the rest of the purchase price to be financed through a mortgage, lenders will likely require an overview of your finances including crypto assets gains.

Completion

Once the parties arrive at the completion stage, the buyer will transfer the fiat funds to their solicitors, as will the mortgage provider if applicable. The solicitors on either side will then ensure the timely transfer of funds and completion of formalities to record the transaction and change of ownership of the property.

 

Using crypto assets to purchase property

Whilst certainly a less common route to purchase property, it is also possible to utilise crypto assets themselves for a property purchase. Whilst this route to acquire property comes with additional considerations, complexities and advantages, it can often be a desirable option particularly for those with large crypto portfolios.

Agreement with seller

One of the main considerations and challenges with such an approach is finding a seller who not only has a property to sell that fits the requirements of the buyer, but is also willing to accept crypto assets as a form of payment.

Much like any other property purchase, parties will need to arrive at an agreed figure for the purchase price of the property and, even though cryptoassets will be used in the transaction, the purchase price agreed must be agreed in fiat currency. This is not just crucial for contractual clarity between the parties, but it is also important for the calculation of Stamp Duty Land Tax (SDLT) liability, if applicable.

Agreeing the crypto asset

Both parties will also need to agree the crypto assets to be used in the transaction, and this will require due diligence on the assets involved. It may also be necessary to the current regulatory environment to ensure there are no restrictions on using the crypto assets of choice. If a particular crypto assets was regulated, for example, then strictly speaking it would technically not be permitted to deal in the same without regulatory approval.

From the seller’s perspective, they will have undoubtedly have additional considerations for the crypto assets to be used, and may likely only want to deal in a crypto assets that has sufficient liquidity.

For example, assuming the purchase price of the property is agreed in the sum of £800,000, the parties will then need to agree which crypto asset (or assets) are to comprise the purchase price. In this example, we will assume that the parties agree to transact in Bitcoin and, as of September 2023, the value of 1 Bitcoin is approximately £20,000.

Due to the volatility of crypto assets, it is not uncommon for parties to reach their own agreed upon conversion rate for the crypto assets being used. In this example, if we assume that the parties agree that the Bitcoin used for the purchase will be valued at £19,500, the buyer will have to pay the seller 41.02 Bitcoin.

Due to the nature of using crypto assets in such a transaction, separate agreements may be required that addresses the particular characteristics of these assets. For example, given the volatility of crypto assets, both parties assume a market risk until the transaction is completed. To mitigate this, specific clauses can be inserted into agreements to address scenarios where the crypto assets value changes dramatically before completion.

Specialised mechanisms or escrow type services for the actual transfer of the crypto assets would also likely need to be agreed upon and catered for in a specific agreement. In typical transactions, buyers would usually send the purchase monies to their solicitors, who would then forward it over to the seller solicitors. In a crypto transaction, alternative mechanisms would need to be utilised to ensure that the transaction occurs properly, and payment is sent and confirmed to the relevant parties so subsequent steps in the conveyance procedure can take place.

Solicitors with expertise in crypto assets transactions are crucial in such instances, to ensure legal compliance and clarity.

Post-completion formalities

After the transaction is complete, the usual formalities such as land registration will follow, and these may require special annotation to indicate the use of crypto assets in the purchase. The land registry, in the past, has recorded the sale price of property in crypto assets.

SDLT may also be applicable and will usually be calculated in relation to the value of the crypto assets on the day of completion, as evidenced by reputable data sources.

From the seller’s perspective, they will want to ensure that they can continue to securely hold and access the crypto assets or convert them into fiat, depending on their intentions. Oversight in this regard could lead to difficulties in them accessing the proceeds of the sale.

 

Conclusion

The purchase of property using the fiat proceeds of crypto assets, or crypto assets themselves is not only feasible but can also be an attractive option for both buyers and sellers.

Such transactions are accompanied by a unique set of legal considerations that require specialised knowledge and understanding of the crypto assets sector; from due diligence on the crypto assets used and their liquidity, to understanding the additional legal mechanisms required to ensure a compliant and clear transaction, the process necessitates an expert legal perspective.

Our crypto assets team is equipped with specialised knowledge in the crypto asset sector, enabling us to guide clients through each step of this innovative transaction method. If you are contemplating diving into the world of property purchases via crypto assets, we are here to assist and advise.

A brief guide to the different types of cryptoassets

Posted on: September 20th, 2023 by AlexT

It is a common misconception that the existence of crypto assets was ushered in by the arrival of Bitcoin in 2009. In reality, the concept of digital or cryptographic currencies significantly predates Bitcoin, and there were several attempts to create a digital, decentralised form of currency before Bitcoin, for example eCash and HashCash. However, whilst Bitcoin was not the first attempt at a cryptocurrency, it was the one that solved certain key issues, such as double spending and decentralisation, more effectively than its predecessors. In this sense, it was undoubtedly the cryptocurrency that propelled crypto assets into mainstream recognition.

Since the introduction of Bitcoin, the world of crypto assets has grown exponentially, and the market now consists of tens of thousands of different crypto assets, each with their own functionalities, supposed use cases, and legal implications.

Are coins the same as tokens?

From a legal and regulatory perspective, the terms coins and tokens can and are used interchangeably in relation to crypto assets, and both terms essentially have the same meaning when used in this context.

However, in crypto centric terms, Coins and Tokens have very different meanings.

Coins are usually used to refer to those crypto assets which act as native crypto assets to their own blockchain. For example, Bitcoin on the Bitcoin blockchain, or Ether on the Ethereum blockchain. Coins are usually intended to function as a digital store of value or medium of exchange.

Tokens, on the other hand, are crypto assets that operate on an existing blockchain network instead of their own. Whilst tokens can also be used in a similar fashion to coins, they are often created to fulfil different purposes to coins, for example to raise funds or give access to particular services. Some examples of tokens include Shiba Inu, Tether, and Basic Attention Token.

So, whilst most of the regulatory language in the UK refers to “tokens”, it should be remembered that this is not a reference to the crypto specific definition of a token, and is essentially used as a technologically neutral term in a legal and regulatory context.

Altcoins and memecoins

An altcoin is simply a designation given to any crypto assets which is not Bitcoin (and arguably Ether).

Many altcoins are designed to be used for a specific purpose or to address limitations and innovate upon existing blockchains. One of the first altcoins was Litecoin, which was forked (or simply put, an offshoot) from the Bitcoin blockchain, and offers faster transaction times than Bitcoin.

Memecoins are another subset of crypto assets that often originate from an internet meme or joke, yet can attract serious following and price appreciation.

Memecoins often do not aim for any specific functionality or utility, and primarily gather attention through social media, viral marketing and online community engagement. They represent a fascinating microcosm within the crypto assets world and can sometimes evolve into more refined projects with defined aims and utilities.

An example of a memecoin is Dogecoin, which experienced significant growth in a relatively short period of time, reaching a value of $0.68c at its all time high in May 2021, meaning it had a market cap of around $88 billion.

Stablecoins

Despite the name, most stablecoins are usually tokens utilising existing blockchains – another quirk of usual crypto lexicon!

One of the endemic characteristics of crypto assets is that they are extremely volatile, and while this volatility can be beneficial, it is one of the characteristics that makes crypto assets unsuitable as a medium of exchange or store of value. Stablecoins exist to address the problem of volatility by pegging their value to an external reference, for example a commodity such as gold, or a fiat currency such as the US dollar.

Whilst all stablecoins maintain their value by some external reference, there are different types of stablecoins.

Some stablecoins are said to be fiat-collateralised – in other words, they are said to be backed one-to-one by reserves of fiat currency. An example of such a stablecoin would be USDC. For every USDC token in existence, there is an equivalent amount of fiat US dollar held in reserve.

Other stablecoins are crypto-collateralised and so they are backed by a reserve of other crypto assets. They utilise smart contracts that automatically adjust the collateral to maintain a stable value. An example of one such stablecoin is DAI.

Some stablecoins are commodity-collateralised and reference the value of a physical commodity such as gold or silver and aim to maintain a peg to that value. For example, Tether Gold is said to be collateralised to gold.

There also exists stablecoins that are not backed by any collateral at all but aim to use algorithms to control their supply and demand and maintain a stable value. There has been increasing criticism of algorithmic stablecoins, particularly since the collapse of Luna and Terra USD in May 2022.

It is a noteworthy point that many jurisdictions are developing central bank digital currencies (CBDC’s) and some have already been implemented such as the eNaira in Nigeria. They are digital, similar to crypto assets, and their value tends to be fixed to their country’s fiat currency much like a stablecoin. However, CBDC’s should not be confused with crypto assets, particularly as CBDC’s are controlled by a central bank or monetary authority, while crypto assets are typically decentralised.

Governance tokens

Governance Tokens are a type of crypto asset that allows holders to vote on decisions related to a particular platform or protocol. They act as a bridge between platform creators and the community of users and allow for an element of democratisation.

Examples of governance tokens include the maker token (MKR), issued by MakerDAO. One MKR token is equivalent to one vote, and token holders vote on several issues including appointing team members and modifying fees.

Fan tokens

Fan tokens are another form of crypto asset that, in essence, represents membership of a fan club of a particular sports team, artist or celebrity. They often allow their holders to access fan membership perks such as voting on decisions, merchandise designs and rewards. They also often grant holders access to privileges such as exclusive content and ticketing privileges.

Football clubs such as FC Barcelona, Manchester City and PSG each have dedicated fan tokens.

Non-fungible tokens (NFT’s)

Non-fungible tokens (NFTs) are a form of crypto asset that represents ownership or proof of authenticity of a unique item or piece of content. They are best thought of as assets that have been tokenised via a blockchain, and they are inherently unique in themselves, such that they are not interchangeable.

For example, a particular ETH coin is essentially no different to another ETH coin, and so they are interchangeable on a one-to-one basis. However, comparing two NFT’s, even though they may look the same will have independent and unique characteristics.

NFT’s can be used to tokenise a wide variety of assets from art and music, to real estate and event tickets.

Popular examples of NFTs include the Bored Apes Yacht Club collection and Cryptopunks.

The legal definition of crypto assets that has been adopted in the UK includes NFTs, and this allows for them to be interpreted within the same framework as other crypto assets which are deemed to constitute property. From a regulatory perspective, an NFT can be unregulated or regulated depending on the rights and obligations that attach to the NFT.

The High Court in England has already demonstrated its forward-thinking approach by allowing the service of legal documents via NFTs. As well as highlighting the flexibility of NFTs, this also highlights the English judicial system’s openness to integrate emerging technologies into practice.

Tokenised Real-world Assets

Another growing subset of assets within crypto assets are tokenised assets that represent a share in a real-world asset, such as real estate, a luxury watch or handbag, vintage cars, and art. These usually utilise NFTs and allow for expensive assets to be broken down into smaller, easily traded units.

The legal and regulatory treatment for these can be complex and very much depend on the nature of the underlying asset which the token represents.

Conclusion

The landscape of crypto assets is diverse and ever evolving, encompassing a range of asset types, many of which fall into one or more of the above categories.

Understanding and appreciating the legal intricacies of these various assets is imperative for both individual and institutional participants in this rapidly growing sector. As a UK-based law firm with a particular specialism in crypto assets, Lawrence Stephens is uniquely positioned to provide expert guidance and innovative solutions to investors, creators and holders alike.

Please do not hesitate to contact our team who will be happy to discuss and identify your needs.