The Remittance Basis and Crypto Assets

The Remittance Basis of taxation is a generous relief on income and capital gains tax available to non-UK domiciliaries.

When a claim is made, most categories of non-UK source income are not taxed unless remitted to the UK.

The same principle applies to gains realized on the disposal of non-UK assets.

Are crypto assets non-UK assets for CGT purposes?

There are different types of crypto assets; cryptocurrency is one of them.

Cryptocurrency includes:

1. Fungible tokens like Bitcoin, Ethereum and Dogecoin;
2. Non-fungible tokens (NFTs) like CryptoPunks or Bored Ape Yacht Club;
3. Stablecoins;
4. Security Tokens.

First of all, we should try to determine if a crypto asset is an asset for CGT purposes.

If it is, the next step is to identify the category to which it belongs to.

To answer the first question, help comes from the following cases:

• D’Aloia v Binance Holdings and others [2022] EWHC 1723 (Ch);
• Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea [2022] EWHC 1021 (Comm);
• Quoine Pte Ltd v B2C2 Ltd [2020] SGCA

They confirm that crypto assets are intangible personal property.

Are Crypto assets UK or non-UK situs assets?

The situs of assets rules for capital gains tax purposes are set out in TCGA 1992 s.275, s.275A and s.275B.

Broadly these are the main rules:

The list is not exhaustive but the mentioned sections cover most of the categories of assets.

Most does not mean all of them and the general rule is that if the situs of an asset is not covered by a specific provision, common law rules apply.

From the above list, it is difficult to establish whether a crypto asset falls into one of those categories.

A crypto asset is not a share, even if it is often traded on an exchange in the same way as shares.

It may be the case that a crypto asset could be an intangible asset.

S. 275A TCGA 1992 deals with the location of certain intangible assets.

The section indicates that if an (intangible) asset is subject to UK law at the time is created, it is situated in the United Kingdom at all times.

When we deal with crypto assets it is hard to establish whether at the time of creation it was subject to UK law as this depends on multiple variables.

HMRC’s view

On establishing the situs of a crypto asset for CGT purposes HMRC crypto manual makes a distinction between assets representing an underlying asset and those that don’t:

“Underlying Asset

Section 275 TCGA 1992 provides an exhaustive list of the different types of assets for the purposes of CGT. Where the cryptoasset is simply a digital representation of an underlying asset then the location of the underlying asset will determine the location of the cryptoasset.

It is possible for a cryptoasset to be a digital representation of another intangible asset, such as share capital or debt, and the relevant rule for determining the location of the underlying asset would determine the location of the cryptoasset.

No Underlying Asset

Where the cryptoasset is an asset distinct from any underlying asset then HMRC’s view is that none of the statutory rules in the TCGA 1992 apply. Instead it is HMRC’s view that:

• exchange tokens have an economic value as they can be ‘turned to account’ - for example, exchanging them for goods, services, fiat currency or other tokens;
• exchange tokens are a new type of intangible asset (different to other types of intangible assets, such as shares or debentures); and
• the only identifiable party to consider is the beneficial owner of the exchange token, such that the location of the cryptoasset will be determined by the residency of the beneficial owner”

The manual goes on by saying that “Using the residency of the beneficial owner of the exchange tokens to determine the location gives a clear, logical, predictable and objective rule which can be easily applied. This means that a person who holds exchanges tokens is liable to pay UK tax if they are a UK resident”.

HMRC’s view on the situs of crypto assets is based on the residence of their beneficial owner.

This can create difficulties when the beneficial owner of an asset is not the same as the legal owner as it may be when crypto assets are traded on an exchange.

Different view

On a note published by STEP called “Location of Cryptocurrencies – an alternative view”, the UK committee issued its view on the subject which differs from HMRC’s:

“In formulating principles to allocate a location to cryptocurrency, we would expect a court’s starting point to be the principles that have been applied in allocating an artificial location to other types of intangible property. These include matters such as enforceability, recoverability, transferability, location of any physical assets to which the intangible is attached and the place where ownership is recorded or registered. It is notable that the residence of the beneficial owner is not a principle that has previously been applied in allocating a location to intangible property.”

Without debating which one of the two seen above is the right view, it is important to consider the implications of HMRC’s for non-UK domiciliaries.

According to HMRC’s manual, a crypto asset is situated where its beneficial owner is resident for tax purposes, in the UK residency is determined by the Statutory Residence Test rules.

This means that gains realized on the disposal of crypto assets by a non-domiciled individual claiming the remittance basis would be taxed on the arising basis.

STEP again do not agree with HMRC’s view:

“whether the location of the cryptocurrency is based on the residence of the beneficial owner or on the residence of the participant in the cryptocurrency system, residence must surely be tested by reference to relevant common-law principles and not by reference to the tax definition contained in the statutory residence test.The reason for this is that………..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 in order to determine residence for this purpose, this would need to be provided for by statute”.

Room for planning?

Unless a taxpayer is willing to go against HMRC’s view by not declaring gains on the disposal of crypto assets when claiming the remittance basis an option to avoid a charge to CGT on those disposals could be to hold crypto assets through non-UK structures.

In that case it will be important to make sure that those structures are not brought under the UK CGT charge by way of residency or that they fall foul of the anti-avoidance rule found in ss.3-3G of TCGA 1992 that attributes to its participators gains made by a non UK resident company on the disposal of UK situs assets.

Furthermore, HMRC crypto manual only states that residency is determined by the Statutory Residence Test rules which are for individuals only.

STEP do not agree with this by expressing their view that residency should be determined according to common law rules.

For companies, the test for tax purposes is where the company central management and control abides but in the leading case Kwok Chi Leung Karl v CED [1988] STC 728 it was decided that a company is resident in the place where it was incorporated and has its registered office.

As we can see, we are still far from a clear picture and especially from certainty on how to establish where a crypto asset is located for CGT purposes.

HMRC have a slightly different view from the one of the courts or relevant bodies like STEP.

While we wait for more clarity it would be wise for non-UK domiciliaries claiming the remittance basis to hold crypto asset via non-UK structures to avoid gains on the disposal of crypto assets being taxed on the arising basis.

When implementing these structures it will be important to make sure that no legal entity will be considered resident in the UK for tax purposes and that any gain will not be taxed on a participator’s hands under ss 3-3G TCGA 1992.