Location of exchange tokens held by individuals: new HMRC guidance issued

HMRC has now issued guidance on the location of exchange tokens held by individuals for income tax and capital gains tax purposes. This will be particularly relevant to non-domiciled individuals claiming the remittance basis of taxation in any given tax year. In seeking a test that is predictable and easy to apply, HMRC will consider that the location of exchange tokens follows the jurisdiction of tax residence of the individual holder.

HMRC’s Test of Location

Exchange tokens are a subset of cryptoassets which are intended to be used as a method of payment. Such tokens encompass cryptocurrencies like bitcoin.

In its new guidance, HMRC has adopted the view that the location of exchange tokens follows the jurisdiction of tax residence of the individual holder for income tax and capital gains tax purposes. The guidance does not specify the legislative support for adopting this approach although HMRC acknowledges that it “has considered other possibilities, but at this stage in the development of these tokens has found that a residence basis most accurately fits the majority of transactions”.

The guidance confirms HMRC’s view that:

• exchange tokens have an economic value as they can be ‘turned to account’, for example, by exchanging them for goods, services, fiat currency or other tokens;
• exchange tokens are a new type of intangible asset which are 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.

Effect of HMRC’s Approach

HMRC states that using the residency of the beneficial owner of the exchange tokens to determine the location of those assets “gives a clear, logical, predictable and objective rule which can be easily applied”. While this approach undoubtedly has the merit of simplicity, it is unsupported by legal precedent or legislative authority. To the extent that the common law and current legislation leaves a lacuna, it should be left to Parliament or the courts to formulate how the location or situs of exchange assets should be determined. It follows that should the question of the location or situs of exchange tokens be put before the courts, it may well be answered differently. It also remains to be seen how this approach will interact with approaches taken by other jurisdictions.

One significant consequence of HMRC’s approach is the effect on non-domiciled individuals claiming the remittance basis of taxation. Such individuals do not pay UK income tax or capital gains tax on unremitted income and gains arising outside of the UK. Under HMRC’s approach, should such individuals become tax resident in the UK, any exchange tokens held on the date of becoming UK tax resident will automatically be deemed to be located in the UK. Gains arising on the disposal of such exchange tokens will then be subject to UK capital gains tax. This represents an erosion of the benefits of the remittance basis of taxation which could grow in significance as the use of exchange tokens becomes more widely adopted.