This article was originally published in EPrivateClient and can be accessed here. 

Digital assets and cryptocurrencies

The Law Commission earlier this year published a call for evidence on possible reform of the legal treatment of crypto-assets and digital assets in England and Wales.

The Commission is seeking to ensure that property rights regarding digital assets receive “full and consistent recognition and protection” under the law, and is investigating the potential consequences of digital assets becoming “possessable” (under current law, a digital asset can be “owned”, but not “possessed”, because the concept of possession is currently limited to things which exist physically / tangibly). The call for evidence closed on 30 July 2021.

The Commission’s project arises in a context of rapidly increasing uptake of cryptocurrencies.

Up to ten million people in the UK now hold some form of cryptocurrency among their assets. Surging interest in cryptocurrencies, and the substantial (albeit volatile) increases in value that can accompany them, mean that they are no longer a rarity in a client’s asset portfolio. However, given their relative newness, cryptocurrencies may not be something which all private client lawyers feel entirely comfortable dealing with, and advising upon.

Pending the Law Commission’s recommendations, and any resulting law reform, it is suggested that advisors should bear in mind the following taxation, estate planning / succession, and practical points when advising clients who hold cryptocurrencies:

Taxation

• Cryptocurrencies received as non-cash payment from e.g. employers are subject to income tax and National Insurance contributions, as they are considered to be “money’s worth”;
• Cryptocurrencies are liable to capital gains tax (CGT) on disposal;
• Cryptocurrencies held in a deceased person’s estate form part of their taxable estate on death and may be subject to Inheritance Tax (IHT);
• The location (situs) of cryptocurrencies may need to be determined for UK resident and non-domiciled individuals when computing their CGT and IHT liabilities;
• The value of cryptocurrencies must be converted into sterling for the purposes of an IHT return, and the valuation methodology ought to be consistent and should be retained in case HMRC raise any queries;
• The spouse exemption for IHT purposes (i.e. 100% relief from IHT provided the spouse is UK-domiciled) should be available on any gifts of cryptocurrencies during lifetime or on death;
• When dealing with a deceased person’s estate, if the value of cryptocurrencies in the estate has fallen between the date of death and the date on which the assets are sold, IHT loss on sale relief will not be available (because such relief is broadly only applicable to land or quoted shares, provided certain conditions are met).

Estate planning / succession

• As with other digital assets, it can be difficult for the executors of a deceased person’s estate to ascertain the extent of their ownership of cryptocurrencies. Investors ought therefore to hold detailed inventories which identify their digital assets as part of their estate planning generally, so that their executors can establish the full extent of their estate held online after their death. Such inventories should be kept up to date and stored securely, and should include all relevant passwords, usernames, and public and private keys required to access cryptocurrencies;
• Given that there is no centralised ownership register of cryptocurrencies, it will only be possible for executors to prove ownership and obtain access to cryptocurrencies where an investor has given their executors instructions on how to access their “private key” (required to access cryptocurrencies). If the private key for a particular cryptocurrency is lost, executors / beneficiaries will be unable to access the asset, which will be lost forever;
• Another point to bear in mind is that, although cryptocurrencies meet the definition of “property” in English law (and therefore give their owners proprietary rights, such as the ability to pass the assets on by Will), other jurisdictions (such as Italy) treat cryptocurrencies as currency, rather than property. Accordingly, because different jurisdictions may have different definitions of what cryptocurrencies are, cryptocurrencies may be treated differently for taxation and legal purposes in different jurisdictions. Therefore any advice given to international clients should include suitable local advice to avoid undesirable unintended consequences.

Practical points

• Given the volatile fluctuations in the value of certain cryptocurrencies, it is arguable that executors would be well advised to sell cryptocurrencies soon after death to avoid the risk of sudden drops in value. This might avoid accusations by beneficiaries that the executors failed in their duty to obtain the best price reasonably obtainable for the cryptocurrencies;
• Clients should be advised to put Lasting Powers of Attorney (LPAs) in place (if they do not already have them) to cover the possibility of loss of mental capacity resulting in the loss of access to their cryptocurrency accounts. A Financial Decisions LPA can include explicit authority for the attorney(s) to manage any cryptocurrencies (and again, sufficient instructions should be given to the attorney(s) to enable them to access the cryptocurrency accounts).

Cryptocurrencies are still a relative unknown to many individuals, but given their ever-increasing use, it is important that advisors are aware of the above points to ensure that they are able to appropriately advise those clients who do hold cryptocurrencies.