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U.K. Accepts Cryptos as Financial Instruments, Bringing Tax Clarity

Nov. 13, 2018, 12:22 PM

Cryptocurrency traders have more clarity on which U.K. taxes apply to crypto assets due the government’s acceptance that a security token can be treated as a regulated financial instrument.

Security coins or security tokens are crypto assets that are backed by some form of security—for example a single token backed by a ownership of a single share, would mean it could be exchanged for a share, at the discretion of its owner.

This link to securities and the government accepting their regulatory status means that taxpayers can feel more assured that, different types of withholding tax, value added tax or stamp duty could apply, depending on the legal structure of the token, said Ben Brown a partner at DLA Piper U.K.

“If you have a token that is for all intents and purposes a debt security, that raises an amount of money and that creates an obligation for repayment which carries interest, then tax can arise for both the issuer and the investor,” he told Bloomberg Tax Nov. 12.

While not the same as guidance, the government setting out its view in an Oct. 29 report published by its cryptocurrency task force. Explaining its reasoning will likely help investors figure out which taxes apply.

“They aim to provide the familiarity of a security with the ease of transfer promised by cryptocurrencies,” said Obi Nwosu, CEO of Coinfloor.

All U.K.-sourced interest paid by these instruments would apply interest withholding tax and stamp duty reserve tax could apply to the exchange of the tokens he said.

What is less clear is whether companies making these payments can deduct interest payments from their corporate tax.

“If tokens are securities within the meaning of European capital markets law, this would have enormous consequences,” Heino Büsching, a tax partner at accounting firm CMS told Bloomberg Tax Nov. 12.

The specific structure of a token and the associated legal status of the owner as a result of secularization, can influence the accounting and tax law assessment, he said.

The effects on the U.K. crypto-market will likely be significant when the government publishes more detailed tax guidance early next year.

Security

In its report the government also admits that the novel nature of these tokens and the presence of new market participants often mean that investors don’t understand that they are classed as regulated financial assets.

Their connection to regulated securities mean that the tokens can fall under a regulated banner, but tax guidance is as yet unclear on what this could mean and will have to be taken on a case-by-case basis, according tax practitioners.

Brown noted that whether or not a security token has equity-like or debt-like qualities could have major implications on the taxes that apply. “For example, stamp duty reserve tax only applies to marketable securities or chargeable securities. If a security token meets these requirements is often debatable,” he said.

A marketable security is one that can be marketed on regulated exchanges and a chargeable security is one that is based on a marketable security, for example a derivative contract.

The U.K. financial markets regulator, the Financial Conduct Authority, has promised to consult further on defining security coin structures and Her Majesty’s Revenue and Customs has also promised to publish new tax guidance for the sector early in 2019.

Taxpayer’s Best Guess


Despite giving some clarity, most taxpayers will continue to be left uncertain about what taxes could apply, said Adrian Markey, a chartered accountant specializing in tax advice related to crypto assets.

“Previously the government had given very brief noncommittal guidance on how they would tax cryptocurrencies in 2014. This plus a few letters dealing with specific taxpayer concerns have made it clear that capital gains tax applies, and that bitcoin was to be treated as an intangible financial asset,” he said.

The lack of guidance so far has put the onus on taxpayers to make their “best guess” of what HMRC expects, with statement on security coins adding a new layer of confusion, said Markey.

The problem, he argues is that HMRC has not officially classed cryptocurrencies as financial securities in the tax guidance it has published to date, so taxpayers can’t be sure of what taxes are due.

“The FCA has said a while back that derivative markets, regardless of the assets they are based on, are under their purview. However, without specific guidance about what taxes apply are the at the best guess of the taxpayer and their advisers,” he said.

The differences could be significant, when you consider derivatives are taxed compared to how shares are taxed, he added.

It’s not just an issue for figuring out which tokens are regulated—DLA Piper’s Brown, notes that figuring out whether the asset is being “created” by the company or “disposed of” could create different tax outcomes.

Initial coin offerings, a means of raising capital for new cryptocurrency ventures, could be tax free if the tokens they are generate are treated the same as an initial public offering (IPO) of shares.

“The share is treated as created rather than disposed of by virtue of the issuance—so that no tax charge arises,” he said.

This is an important point for security tokens in particular, because their most promising application is the ability to issue tokens that represent a company’s shares he said.

To contact the reporter on this story: Hamza Ali at hali@bloombergtax.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com