Cryptocurrency is big business. Since the launch of Bitcoin in 2009, thousands of altcoins (variants of Bitcoin or other cryptocurrencies) have been created. In fact, at the time of writing, there are a total of 2,866 currencies available with a Total Market Cap of $241,072,188,224; and $127,009,393,829 traded in the past 24 hours (Source: Investing.com). Over the past five years, the value of a Bitcoin has grown from just a couple of hundred pounds to more than £6,000 – hitting highs of £14,000+ at its peak. But what is the tax status of these potentially valuable assets and can they be left in a Will?
“Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically. While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.” ~ HMRC
Cryptocurrency is a ‘digital’ or ‘virtual’ currency which has been created by ‘distributed ledger technology’, meaning a network of computers that has no central control where each computer has equal access to the network. The term ‘crypto’ which originates from the Ancient Greek kryptós, meaning ‘hidden’ or ‘secret’. Cryptocurrency uses encryption techniques to regulate the generation of units of currency and to verify the transfer of funds, but these processes operate independently of a central bank.
The units of currency, represented by cryptographic information, are ‘tokenised’ and given value, so that they may be transferred or traded.
Proof of ownership and storage
To prove you own cryptocurrency that has a value, you will have cryptographic keys. These are in pairs – a public key and a private key. If you have both, this proves you own the currency.
Unsurprisingly, your digital currency is stored in a digital wallet rather than a physical wallet that you can put in your back pocket! Digital wallets can be ‘cold’ or ‘hot’. Cold wallets are those which are not and have never been connected to the internet. These are pretty secure and hard to hack! Hot wallets by contrast are those on devices that are connected to the internet, creating a possibility that they could be hacked.
Inheritance, capital gains and income tax
HMRC published an updated version of its guidance Cryptoassets: tax for individuals on 20th December 2019. This updated guide included a new section on the legal status of cryptocurrency exchange tokens, in the context of Inheritance Tax and Capital Gains Tax.
The guidance confirms that:
- Capital Gains Tax is due when you dispose of cryptoassets, whether by way of a gift, trade or swap.
- Income Tax and National Insurance contributions are due on cryptoassets received from mining, transaction confirmation or airdrops.
- Cryptoassets are property for the purposes of Inheritance Tax.
The latter means that cryptoassets can be left in your Will, and will attract Inheritance Tax like other assets if you are a UK resident for tax purposes.
Note that for Wills executed on or after 1 October 2014, the definition of “personal chattels” includes all tangible movable property owned by the testator except business assets, investments and money. Digital assets are not tangible and will not therefore be included in any gift of your personal property. To ensure your cryptoassets are inherited by your choice of beneficiaries and to avoid any confusion, they should be dealt with specifically in your Will.
Passing on cryptocurrency
Naturally if you want to leave your digital currency to someone in your Will, you’ll need to let your personal representatives know about the existence of the digital wallet – although you shouldn’t simply hand over access now! Your private and public keys must be stored safely and securely, alongside details of where their digital wallet is. Your PRs need to be able to get hold of this information after you die. If the information is lost, remember that the ‘distributed ledger technology’ means there is no central computer that can be consulted. The cryptocurrency is lost too.
Find out more about digital assets here.