As the Cryptoasset and NFT space continues to grow and evolve, us as tax advisors are keen to provide compliance and technical advice and allow our clients (both individuals and businesses) to plan ahead with the peace of mind they are accurately reporting the relevant and necessary details to HM Revenue and Customs.
The key areas we identify as needing immediate review and clarification are the reporting requirements from a Capital gains tax perspective; ownership and accessibility of Cryptoassets at an Inheritance tax reporting stage and guidance on Non-Fungible Tokens from both a trading and an investment perspective.
The CIOT has made its representation for the Autumn Statement 2023, and also completed the submission response to the recent HM Revenue and Customs consultations on Decentralised Finance (Defi) and the need to reform the regulation framework.
The key areas in the CIOT’s recommendations where amendments and clarifications are required in respect of Cryptoassets is set out below:
Classification of Cryptoassets
There is a need for and importance that the legislation to be amended to expressively cover and confirm the tax treatment of Cryptoassets. The CIOT’s recommendation is to classify Cryptoassets as a distinct form of property which is completely separate from the current personal property categories. Considering the taxes mentioned below plus ensuing Corporation tax and Stamp duty is also addressed accordingly.
Lex-Situs Determination
A clear definition for the basis of determining the location of Cryptoassets is required within the legislation. To enable a consistent approach to be taken when considering the UK tax treatment of such assets.
Value Added Tax
The situs and use of Cryptoassets must be addressed within the VAT legislation, at present there is a lack of guidance which in turn causes great uncertainty of the accurate taxation of this asset class.
Income Tax
A revision to the current ‘badges of trade’ should be implemented to help clarify which Cryptoasset activities constitutes Trading income and which activities will be classed and taxed as Miscellaneous revenue.
Inheritance Tax
For Cryptoassets to be included as ‘qualifying investments’ within the Inheritance Tax Act, which will ensure and enable relief for estates in such cases as a fall in value and where access keys have been lost.
Capital Gains Tax
The unique nature of Cryptoassets must be acknowledged with the capital gains tax section of the legislation, allowing for a shift away from the current comparison to ‘Company Shares. A review should be taken on the current share matching rules being applied to Cryptoasset transactions/disposals*
The need for these areas to be addressed is imperative to achieve the desired outcome when it comes to compliance and accuracy of reporting income, gains, and losses from this asset class. With the proposed changes to the 2024 UK Self-assessment tax return, to include separate reporting pages for Cryptoasset capital disposals.
Whilst we agree with the CIOT proposals in general, we are aware that it comments on separating the reporting of wallets held by clients. Whilst it may support a measure to simplify reporting from a CGT perspective it could also reduce the accuracy and underlying base cost value of each of the Cryptoassets held.
This will need to be followed with separate reporting pages relevant to each of the tax areas mentioned above. Whilst the accuracy of reporting is a key element of the proposed changes, they also look to achieve and establish a framework that allows for understanding, encourages investment, increases public confidence, and support the Cryptoasset ecosystem and move towards the UK becoming a Global Crypto Hub.
Other recent news in the Cryptoasset landscape
From 8th October 2023, new FCA regulations in respect of marketing and promotions have been introduced in the UK by amendments made to the Financial Promotions Order (FPO).
Qualifying Cryptoassets have been added to the list of ‘controlled investments’ in the FPO and from 8th October 2023 there will be limit routes available to communicate a financial promotion in the UK which relates to qualifying Cryptoassets.
It should be noted that Non-Fungible Tokens (NFTs) are currently out of the scope of the new regime.