Not everyone owns a cryptoasset. Not everyone will know what a cryptoasset is.
It is certain, however, that some charities will find themselves in the position of receiving a cryptoasset as a gift from a kindly benefactor, and a recent legal statement produced by a UK government backed task force has provided some welcome clarity on the status of such assets under the existing law – including how they might be transferred as a gift, for example.
What is a cryptoasset?
The legal statement actually concludes that is difficult to give a precise definition of a cryptoasset.
A cryptoasset of which some people might have heard is “Bitcoin”. Essentially, this is a new electronic payment system “based on cryptographic proof instead of trust”, with digital tokens (Bitcoins) taking the place of traditional currency. It was first proposed in 2008, and relies on Distributed Ledger Technology to function.
Since then, however, more systems have been created using cryptographic techniques to implement commercial applications. Many of these involve dealings in assets that only exist through a digital representation within the system. Broadly speaking, the word “cryptoasset” is understood to refer to that digital representation.
The legal statement suggests that, given the pace of technological developments, a precise definition of “cryptoasset” may not even be useful. So, instead of trying to give a precise definition, the legal statement identifies the key features or characteristics of a cryptoasset. These are:
- cryptographic authentication;
- use of a distributed transaction ledger;
- decentralisation; and
- rule by consensus.
The statement recognises that some cryptoassets will be “tethered” to tangible assets that are external to the system, such as money or a contractual right of some kind. However, the statement focuses on the status of the cryptoasset itself rather than any connected assets.
So, what is the status of a cryptoasset, legally?
This legal statement is important because it confirms that a cryptoasset is, in principle, to be treated as property.
None of the key features or characteristics of a cryptoasset have the effect of preventing it from being an item of property. It is not property that can be possessed physically, like a house or a car, but at the same time it is probably not like a debt or contractual right – unless it embodies a legally enforceable right or obligation. Instead, a cryptoasset is a different kind of property, like a carbon emission allowance, for example.
As cryptoassets are virtual, the legal statement also confirms that what, if any, security can be granted over a cryptoasset will depend on the features of the particular cryptoasset.
Why is this newly recognised status important?
The legal statement provides some welcome clarity as to what cryptoassets are – legally, at least!
The information contained in the legal statement about the legal status of cryptoassets as property mean that those in possession of such assets can be more confident about how they can be transferred, handled and dealt with.
A court that has to resolve a dispute in this area will not be obliged to follow the conclusions reached in the legal statement, but we can expect that it would.
Tax treatment on gifts of cryptoassets by businesses
HMRC has also recently produced a policy paper on the tax treatment of certain cryptoassets, including when such assets are gifted to charity by a business.
The paper only considers the tax treatment of exchange tokens, such as Bitcoin – further guidance will be published in the future to address the tax treatment of other kinds of cryptoassets.
The paper provides that if a company or business carries out activities involving exchange tokens, such as buying and selling exchange tokens, exchanging them for other types of assets, providing goods or services in exchange for such tokens or “mining” such tokens, then the company will be liable to pay tax on them.
The tax payable will vary depending on who is involved in the business and the types of activities, but could include Corporation Tax, Capital Gains Tax, Income Tax, Stamp Taxes or VAT. The amount of tax will likewise vary depending on the income, expenditure, profits and gains of the business, as declared in its tax return.
Usefully, the policy paper confirms that if a company disposes of exchange tokens to a charity, the company will not have to pay Corporation Tax on any gain that has accrued unless the donation is “tainted” or the company disposes of the exchange tokens to the charity for more than the company’s acquisition costs of the exchange tokens.
The Law Commission will consider if any new legislation is needed in this area, based on the contents of the legal statement, and we can expect further guidance from HMRC in due course on the tax treatment of other cryptoassets.
In the meantime, given the variation in cryptoassets, it may be prudent for any charity that finds itself the recipient of a cryptoasset as a gift to seek legal advice on what exactly it can do with that particular cryptoasset.