Following on from last month’s article covering the basics of how cryptoassets are taxed, this article considers some of the more challenging international aspects of cryptoassets for individuals and businesses. This area is complicated and the tax adviser’s job is made more difficult by the additional challenges that come from cryptoassets, and by the lack of clear guidance from HMRC or the courts, which means that some of the positions taken in this article are open for debate and challenge.

Tax issues for individuals

Income from cryptoassets can arise in various forms, including from mining, staking, airdrops, and receiving cryptoassets as payment for goods or services or as remuneration.

Cryptoassets are considered by HMRC to be chargeable assets for capital gains tax (CGT) purposes (CRYPTO22050). That means that capital gains and losses arise when cryptoassets are sold, exchanged or given away.

Cryptoassets are considered to be ‘property’ for inheritance tax (IHT) (CRYPT25000). Therefore, IHT charges can apply where cryptoassets form part of a death estate, on certain lifetime gifts and on exit and 10-year charges for relevant property trusts.

The location of cryptoassets

The location, or situs, of cryptoassets, as it applies to CGT and IHT, is particularly relevant to non-UK domiciled individuals (commonly referred to as ‘non-doms’) who are currently able to use the remittance basis, or who are not yet deemed-UK domiciled for IHT purposes. The government has announced that the non-dom regime will be abolished and replaced with the foreign income and gains (FIG) regime from 6 April 2025. The situs of cryptoassets is also relevant for the proposed FIG regime. 

HMRC’s published view is that in most cases, the situs of cryptoassets should be determined by the residence of the beneficial owner (see CRYPRO222600). The only exception to this is where the cryptoasset is a digital representation of an underlying asset, in which case it is the location of the underlying asset that determines the location of the cryptoasset. 

HMRC’s approach means that, while an individual is UK resident, any cryptoassets held as beneficial owner will be considered to be located in the UK. The person will, therefore, potentially be subject to UK CGT if they dispose of cryptoassets while UK resident, regardless of whether or not they claim the remittance basis (or qualify for the proposed FIG regime) in the tax year of the disposal.

Further, if a taxpayer’s non-UK income and gains that arose in a remittance basis year is used to acquire a cryptoasset, either while the purchaser is UK resident or temporarily non-UK resident, there could be a remittance of those funds, resulting in further tax charges.

Cryptoassets may give an IHT exposure for individuals living in the UK, regardless of their deemed-domicile status or their tax status under the proposed new 10-year residence-based IHT regime to be introduced alongside the FIG regime. 

HMRC’s view on the situs of cryptoassets is not necessarily supported by existing case law or legislation given the very different nature of cryptoassets. It also contrasts with the views held by tax authorities in other jurisdictions. Ireland, for instance, looks to the location of the server on which the wallet is held. There may well be litigation through the courts in the future, or new legislation, which would help provide additional clarity to international taxpayers.

HMRC does not specifically comment on the situs of cryptoasset-related income. Where cryptoassets are received as employment remuneration or as income derived from a trade, then the location of the employment duties or the trade will determine whether the income has a UK or a non-UK source. The position is less clear for income received through staking rewards or as airdrops. If the recipient is UK resident, then HMRC could take the view that the cryptoassets have been remitted to the UK on receipt, meaning that if the income was foreign sourced, then it would not be protected by a remittance basis claim.

Tax issues for businesses

As the cryptoasset sector expands and matures, as with other sectors, businesses must navigate the complex web of international tax considerations. Cryptoasset businesses now often operate across multiple jurisdictions, and unfortunately the tax implications are often an afterthought. However, understanding the international tax perspective is crucial for compliance and strategic planning. 

Tax residency and permanent establishments

Tax residency rules vary by country, but generally, a business is considered resident where it is incorporated or where its central management and control are located. For cryptoasset businesses, this can be particularly complex due to the decentralised nature of operations. Substance is often decoupled from the jurisdictions in which entities are incorporated. This challenge is compounded by the floating locations of key personnel and decision-makers, who often label themselves as ‘digital nomads’.

Groups may inadvertently create a permanent establishment (PE) in jurisdictions. Care must be taken to monitor where activities are undertaken and where people are located globally. It is essential to maintain a tight grip on managing compliance around these issues, particularly since jurisdictions may have differing rules and thresholds on what triggers a PE.

Intellectual property and operating model design

Intellectual property (IP) is a common feature among cryptoasset businesses. Considering where IP and the associated development, enhancement, maintenance, protection, and exploitation functions are situated is vital from the outset of any structuring discussions. Groups should also ensure they are taking advantage of any local incentives such as research and development tax credit reliefs.

There is often a requirement to set up overseas local entities for regulatory, legal, or resourcing purposes. To maintain optimum operating models and frictionless transaction flows, this typically results in a web of intra-group service and licence agreements. This gives rise to cross-border payments, and careful consideration must be given to any domestic withholding tax obligations and access to double tax treaties. This can be challenging where groups establish local entities in jurisdictions lacking a comprehensive tax treaty network, such as the Cayman Islands and the British Virgin Islands. It is also essential to consider the local economic substance requirements in these territories.

Businesses need to adopt a robust transfer pricing policy where key value drivers are identified and where the functions that contribute to those value drivers are based.

Treasury functions

Cryptoasset businesses inherently hold tokens, whether exchange, utility, security tokens, or stablecoins. Careful consideration must be given as to where these cryptoassets are held and who the beneficial owner of the tokens is, particularly in custodian or staking arrangements.

For businesses in the UK, the sale, exchange of a token for another type, or exchange of a token as a form of payment for goods or services may result in a dry tax charge (ie, where no cash proceeds are received out of which to pay the tax liability). Further, the underlying uncertainty of the tax treatment – whether under chargeable gains or trading – can result in losses not being able to offset against profits or gains. Therefore, the business may conclude it is more tax efficient for the token to be held in an overseas entity where a tax charge is not triggered for selling, exchanging, or using tokens as payment. It is essential to understand the tax treatment of any tokens held in an entity outside the UK.

Where groups rely on liquidating tokens for working capital requirements, careful consideration must be given to how their treasury function is managed and from where.

Members of ICAEW’s digital assets working party who have contributed to this article include Dion Seymour (Andersen LLP), James Carn (Evelyn Partners) and Yuri Hamano (BDO LLP).