Tax and Trusts in the Cryptic Cryptosphere

Bitcoin, Ethereum, even Dogecoin – many will have been scratching their heads in recent months over the latest mania to grip the nation and the wider financial community. We could talk about non-fungible tokens (also known as NFTs), but it is perhaps best to leave that aside for now. This article looks at the growth of cryptoassets and it can form part of an estate for tax purposes. 

Current estimates put the market capitalisation of all cryptoassets at around $2 trillion following an astronomical surge in interest and investment so far in 2021. This burgeoning market and its underlying asset class is the internet’s gold with a new generation of investors rushing to reap the initial gains, even with the plentiful supply of critics and naysayers.

What might appear to be 2021’s version of the late 1990s dotcom bubble or 1636’s tulip mania, institutional investment is on its way and, with that, wider societal acceptance and faith in this new asset class. By way of comparison, the total value of the world’s gold is estimated to be around $9 trillion and the value of all global investments (including publicly traded shares, bonds and real estate etc) is around $360 trillion. By comparison, the market capitalisation of cryptoassets is not yet even 25% the size of gold and less than 0.3% of the value of all globally invested wealth.  

To understand cryptocurrency, let us consider gold further. Gold has been in circulation for  the purposes of trading and as a store of value since time immemorial. It is a curious metal as it serves little practical purpose in industry, but it has retained its value over time due to two fundamental characteristics: its attractive appearance and use in jewellery and, most importantly of all, its finite supply. Markets fluctuate, but supply and demand are its essential forces. For what is a marketplace other than the convergence of human sentiment and feeling in a financial context? For there to be demand for gold, there has to be widespread faith and acceptance not just in the value of the asset but also the knowledge that you own something that not everyone has but that everyone, potentially, wants. Enter cryptoassets…

Let us talk tax, shall we?

Rather than delving too deeply into this cryptic world and championing its merits as an asset class, let us turn to the more wearisome world of tax and estate planning.  We are witnessing a seismic transfer in wealth from traditional capital assets to cryptoassets and investors are increasingly asking how their assets might be taxed and how they should be held both during their lifetime and on death.  

First and foremost, what is a crytoasset? HMRC appear to have also been scratching their institutional head in recent years and perhaps, to the displeasure of some, we finally have some certainty on their interpretation. Of course, we should not forget that this is a fast changing area and HMRC’s interpretation is not yet enshrined in law. We should not, however, underestimate HMRC’s efforts to legislate in the absence of legislation

Importantly, HMRC does not consider cryptoassets to be currency or money.

For individuals, anyone disposing of cryptoassets will be subject to UK capital gains tax (CGT) on the gain, and the gain should be reported on their self-assessment tax return.

There is some possibility, however remote, that HMRC considers that an individual’s activities fall under the category of trading as they are buying and selling the assets on an ongoing basis. HMRC will evaluate each case on its fact and will consider factors such the frequency, level of organisation and sophistication whereby such activities could constitute trading. To the disappointment of avid crypto investors, for UK tax purposes, profits will be treated as income and so be subject to UK income tax and not CGT. This would invariably mean that trading in cryptoassets attracts a higher rate of tax than if an investor bought cryptoassets and disposed of their holdings as a later date. Investors should be aware of this possibility at the outset.

There is, however, one curious cultural characteristic of the crypto community: HODLing. This term was popularised after an early crypto investor explained that his strategy with Bitcoin was to HODL, a clear misspelling of the world HOLD. In more recent years, HODL has become the defining feature of the crypto world and now means that you intend to Hold On for Dear Life and therefore never sell! The expectation is that by HODLing, investors will limit the supply of cryptoassets on the market and therefore inflate the price as demand continues to rise.

Now, naturally, if an investor is ‘sitting’ on and not realising a gain then no tax arises in such circumstances. However, given the UK’s current debt crisis, perhaps the government will ponder a wealth tax which could target holdings of wealth including cryptoassets. This is will be an area to watch in the coming months.

Where is my asset located for tax purposes?

For the majority of clients who are UK resident and domiciled for UK tax purposes, HMRC will treat your disposals of cryptoassets in the same way that they would treat any gain arising anywhere in the world, namely that it falls into the UK tax net. For UK resident non-UK domiciled clients, the answer is far less straightforward. To summarise, individuals who are resident but not domiciled here will pay tax only on their UK source income and gains and on non-UK source income and gains only to the extent that they are remitted (ie brought back) to the UK.

As for cryptoassets, how do we determine whether they are UK situated or not and therefore whether they fall into the UK tax net for non-domiciled individuals? Cryptoassets are intangible and digital assets comprising a set of code that is recorded on a decentralised ledger also known as blockchain. As there is no central register or geographically identifiable ledger, the usual rules on determining the situs of intangible assets are thrown up into the air.

HMRC released guidance at the end of 2019 setting out their view that the taxpayer’s cryptoassets are situated in the jurisdiction of the taxpayer’s residence. We assume that HMRC is referring to tax residence (determined by the UK’s Statutory Residence Test) and not habitual residence. The consequence of this, to the extent that it is upheld and perhaps passed into law at a later date, is that a non-domiciled individual who is tax resident in the UK will pay UK tax on the disposal of their cryptoassets merely because they are resident in the UK for tax purposes. This is a departure from the typical rules relating to the remittance basis of taxation (applicable to many UK resident non-doms) such that these individuals can no longer shelter ALL of their offshore income and gains from the UK tax net.

A practical example best illustrates this departure from the rules. Mr X has been tax resident in the UK for the past five years but has not acquired a domicile of choice in the UK and nor is he considered deemed UK domiciled under the 15/20 year rule. Mr X makes a purchase of 50 ETH (the underlying coin on the Ethereum blockchain platform) and the transaction takes place through an offshore exchange using funds from an offshore bank account so that there is no UK nexus to the transaction. A year later, Mr X decides to dispose of his ETH, triggering a substantial gain and Mr X subsequently transfers the sale funds from the exchange to an offshore bank account. In such circumstances, as Mr X is UK tax resident as the time of the disposal he will have made a remittance of the 50 ETH and the gain will be subject to CGT in the UK irrespective of the offshore element and the applicability of the remittance basis of taxation.

What about succession planning and trusts?

This is where the complication really begins to add up. Focusing on lifetime trusts and the relevant property regime (effectively UK trusts with non-excluded property), an individual (the settlor) is liable to a UK inheritance tax (IHT) entry charge of 20% when assets go into the trust, to the extent that the value of the assets exceeds the settlor’s available nil rate band (currently £325,000). If the value of the assets falls below the available nil rate band, it follows that there is no immediate charge to IHT.

The transfer into trust may also trigger a gain for CGT purposes when the cryptoassets are settled on trust, as the transfer is treated as a disposal. In this scenario, it may be possible to claim hold-over relief. This relief has the effect of deferring CGT whereby the base cost will be the original acquisition cost and this is used when calculating the CGT due on a subsequent distribution from the trust. The relief is not obtained automatically but is instead claimed by the trustees and the recipient of the asset and notified to HMRC following certain formalities.

The availability of the nil rate band to mitigate IHT and hold-over relief to defer CGT are all well and good, but there is one major stumbling block – valuation. Using residential property as an example, the market for bricks and mortar is steady and stable, and a valuation three days before a transfer into trust is unlikely to change when the transfer is effect. With publicly listed shares, the market opens and closes at fixed times (closed over weekends and Bank Holidays) and so a valuation at market close is not a complex scientific endeavour. With cryptocurrency, the challenges are far greater. For starters, the market never closes as there is no centrally located exchange. To make matters worse, the crypto market remains extremely volatile and a so-called well-performing cryptoasset could swing 10% up or 10% down in one day – perhaps even as much within a single hour at midnight when UK taxpayers are asleep!

How, therefore, is the value of cryptoassets determined for the purposes of creating or even dismantling trusts? The same issues arise with Will trusts. If, say, the testator creates a discretionary trust for the benefit of his children on death, do we look at the very minute of death to determine the value of the cryptoassets going into trust? Many questions remain and it is beyond doubt that HMRC will be thinking of ways to claw as much tax as possible, however difficult it may be to value these assets.

Practical considerations for Cryptoassets 

In an increasingly digitised world, passwords are practically as valuable as the assets that they protect. Cryptoassets are now commonly stored in a digital wallet, which can be stored online or on external hard drives. Storage and security are clearly of paramount importance to the crypto world. The major takeaway from this is that cryptoassets are only valuable if you have the key to access them. If an individual owning £1 million of Bitcoin does not share the password and provide access to his intended beneficiaries of his estate, the estate would be treated as if it never owned the Bitcoin and the beneficiaries would never receive the benefit. The Bitcoin would be irretrievably lost and no value could ever be obtained. Of course, this would mean that the Bitcoins cannot attract IHT on death as the value has been lost. This is arguably one of those circumstances where a substantial IHT bill would be very well received.

Take the example of James Howells from Newport, Wales. Mr Howells owned 7,500 Bitcoins on an external hard drive, which he accidentally threw away in 2013 when cryptocurrency was worthless by today’s standards. On today’s prices, this crypto holding would be worth somewhere in the region of £300 million and unless the hard drive can be extracted from landfill and the data recovered, that value will be forever lost.

For this reason, it is essential that clients consider leaving a confidential side letter to the executors and trustees of their estate setting out their passwords and any other relevant information relating to access of valuable data and cryptoassets. Of course, this document will have to be kept under lock and key, given its implicit value, with access to it only shared with only the most intimate family members.

Our specialist tax advisers at OGR Stock Denton will be well placed to guide you through the tax regime relating to cryptoassets and would be delighted to advise further. 

If you would like to discuss any of the above issues, please contact Ben Rosen, on 020 8349 0321 or by email

Please note that this blog is intended for information purposes only and does not constitute legal advice.