Vanina’s comments were originally published in STEP Journal and can be accessed here, behind a paywall.
Taxation’s digital battleground
The article examines how the digital economy is being impacted by increasing transparency and an emphasis on global tax fairness, and asks what will happen to the treatment of virtual assets.
Vanina Wittenburg commented:
- Virtual assets have become a big issue in the conversation around money laundering and tax evasion. Why is this, and what do countries need to be doing to ensure that virtual assets are being adequately monitored?
Although HMRC does not consider cryptoassets (such as Bitcoin and other cryptocurrency) to be either currency or money, it does treat them as investments for tax purposes. This means that individuals who own cryptoassets are liable to capital gains tax on chargeable events (e.g. when they are sold for cash, exchanged for other cryptoassets, or given away); and if cryptoassets are received from an employer, or ‘mined’, they are subject to income tax. But because of the increasing focus on cryptoassets with enhanced privacy features, tax authorities across the globe have had to rely on self-declaration by individuals investing in cryptoassets (and for example, HMRC even asks tax payers to keep their own records of cryptoasset transactions, since online records may only exist for a short time). This is because the increased focus on privacy has meant that many cryptoassets are traded in decentralised exchanges, with no records being kept of transactions. They (and the individuals investing in them) are basically invisible. Even where some records may exist, it is possible for individuals to trade in cryptoassets through third parties, then sell them for local currency in jurisdictions with lax anti-money laundering rules. This means that increasing levels of investment in cryptoassets has been linked (whether justifiably or not) with increased tax evasion.
A number of jurisdictions around the globe have started taking action. The Japanese government, which has been ahead of the curve in legislating for cryptoassets, is increasingly pushing for digital asset exchanges to remove anonymous, privacy-enhanced cryptocurrency from their platforms. Japan as well as the US are aggressively pursuing potential tax evaders – the IRS in the latter most notably obtained a federal court order in 2017 to force one of the largest digital currency exchanges, Coinbase, to release details of 13,000 account holders held in its database. The UK is following suit, and has now made a similar request from a number of exchanges, covering the period of the boom in Bitcoin trades in 2017.
This focus on data-gathering, and pursuing potential tax evaders, has been accompanied by increased collaboration and information-sharing between countries dealing with these issues – exemplified by the creation of the J5, or Joint Chiefs of Global Tax Enforcement, a collaboration between tax agencies in Australia, Canada, the Netherlands, the UK and the US.
This is making it increasingly difficult for individuals to keep cryptoasset transactions under the radar of tax authorities – although as technology advances, tax agencies will need to keep up with improvements and changes to privacy features.
- In terms of owning virtual assets, what do clients need to take into account when estate planning?
This depends on the type of virtual, or digital, asset:
(A) When it comes to online accounts and assets which do not necessarily have a monetary value, but may have sentimental value (such as iCloud account holding family photos, email accounts, or social media accounts), clients should review the terms and conditions of each service to check what happens to their account on death. It may be possible for the client to nominate somebody to take over the account, or for personal representatives to access to accounts on presentation of a grant of probate, but not all providers will allow this – and in the absence of any such provisions, the only solution might be for client to keep a list of their accounts, together with usernames and passwords, with their papers, so that executors will have access after the account-holder’s death (although it should be noted that the legality of doing this may be questionable).
(B) As for books, music and films bought electronically, clients need to understand that these are not assets that can be passed to somebody else under a Will. Any such digital assets are purchased under a personal licence – which comes to an end on death, and cannot be transferred. This means that any such assets, which could be worth a huge amount, will be lost on death.
(C) There is better news when it comes to cryptoassets, or cryptocurrency. The UK Jurisdiction Taskforce (UKJT) (chaired by the chancellor of the High Court, Sir Geoffrey Vos) has recently announced that cryptoassets are to be treated under English law as legal property. This is an assessment of the what the UKJT believe the law to be now, and the Law Commission of England and Wales will now assess whether further legislation is needed to implement it. This is in contrast to the digital assets discussed under (A) – over which an individual does not have proprietary rights, only intellectual property rights. This has important consequences for succession, as it means that cryptoassets can be left by Will – although this will require that the personal representatives, or the intended beneficiary, have the private key needed to access the cryptoasset.