Crypto Tax & Accounting Technical Director, Dion Seymour, discusses the Law Commission’s final report on digital assets, the four recommendations made in the report, and how property rights and taxation apply to crypto under English law, in Bloomberg Tax.
Dion’s article was published in Bloomberg Tax, 14 August 2023.
The Law Commission (LC) has released its final report on digital assets, published on June 28, commissioned by the government in March 2020 and followed by an extensive consultation with industry, legal firms and others.
The report concluded that the flexibility of common law is well placed to be able to provide legal certainty to digital assets. They noted the law must continue to develop as the sector continues to evolve. The LC only made four recommendations where immediate action needs to be considered. These were:
- Creation of a third “type” of personal property
- Formation of a panel of experts to provide assistance to the courts
- Amendment of the Financial Collateral Arrangements (No 2) Regulations 2003 (FCAR) legislation
- Setting-up of a project to formulate bespoke legal framework for certain cryptoassets and collateral arrangements
We cannot not cover all of these in depth, however, the recommendation for the creation of a third category of personal property and how this relates to tax is an interesting aspect.
Personal Property Rights
So, what type of property are cryptoassets? The courts, to date, have been able to confirm that it is a form of property but they have not been able to determine what type of property they are. For example, in the case of AA v Persons Unknown it was considered that there are no legal rights attached to cryptoassets but they were some form of property. The fact that cryptoassets do not fit into either category was one of the key issues raised in 2019 by the UK Jurisdictional Taskforce and was a key point that the LC considered needed addressing.
Broadly, there are currently two categories of personal property rights recognised in English law these are:
- A chose in action
- A chose in possession
The word “chose” is a common law concept (it has arisen from case law, not statute) that refers to rights in property. It derives from the French word for “thing.” There are either things in action, for example rights, and things in possession, for example physical possessions.
The report considered English common law to be sufficiently flexible to accommodate cryptoassets, but this residual legal uncertainty remained. Due to their vital nature for modern social, economic and legal systems, the LC considered digital assets should be recognised and protected in law.
Furthermore, any new definition should be sufficiently broad to cover all types of digital assets including cryptoassets (tokens, currencies, non-fungible tokens). A thing will fall within this new category if it:
- Is composed of data represented in an electronic medium. This includes being in the form of computer code, electronic, digital or analogue signals
- Exists both independently of persons and independently of the legal system, and
- Is rivalrous.
Does This Matter for Tax?
Partly. The UK tax authority, HM Revenue & Customs, considers cryptoassets to be an asset, but remains silent on whether they are property, since they are neither a thing of action nor possession. Does this mean that until this is clarified cryptoassets could not be taxed? The short answer is no.
While it is often said by commentators that HMRC considers cryptoassets to be property, the reality, for tax purposes, is that this is not the whole story. The definition of an asset in legislation is broad, with Section 21 of the Taxation of Chargeable Gains Act 1992 stating that “all forms of property shall be assets for the purposes of this act, whether situated in the United Kingdom or not.” The provision includes examples of what is an asset, but it is not definitive. What type of property is a consideration but, for tax, the key test is if something is capable of being converted into money or money’s worth.
The second recommendation in the report is the creation of a panel of experts to provide non-binding guidance for the court. The sector is developing and the LC believes that having a panel of experts from an array of disciplines to help the court stay up to date with developments will facilitate clear, logical and consistent applications of legal rules and reasoning over time.
The recent report from the All Party Parliamentary Group for Crypto Tax and Accounting suggested the creation of a “Crypto Tsar’’ which would have been an ideal interface between the technical expert and the government.
The third and fourth recommendations recognise that there are issues where cryptoassets are used as collateral. These arise particularly with FCAR and relate, partly, to its scope as most digital objects would not come within the boundary of the regulations. These aspects cannot be resolved through common law with the recommendation that the Government establishes a project to find resolutions.
The collateralisation aspect of the report is relevant to tax for two reasons. First, HMRC has recently closed a consultation on possible legislation for the lending of cryptoassets, and while not dependent on FCAR this project could take regulations into a different direction to any potential tax legislation.
Second, the tokenisation of securities is being increasingly considered within the crypto sector, for example where company shares could be represented as a cryptoasset. To achieve this, laws governing the tokenisation of equity and other registered corporate securities by UK companies would need to be reviewed.
There is no immediate impact on taxation following the report however there is much to ponder. The enactment of a third form of personal property will be helpful to the courts but it is not determinative for taxation.
One of the key outcomes from reports such as this is that they continue to recognise cryptoassets in the law. This is a positive for the development of the UK’s crypto sector as no other jurisdiction has had such a thorough review of their legislation.
Agreeing that cryptoassets are property also diminishes the argument that crypto is a Ponzi scheme, with the growing legal basis to demonstrate that there are legal rights attached to them.