Digital Currencies: Issues for your tax and estate planning
Digital or crypto-currencies, the most common being Bitcoins, seem to be in the news every day, whether it’s a report of how their value has seen a mammoth rise (and a reasonably hefty fall), or governments raising concerns about their use and their current lack of regulation. This doesn't seem to have turned investors off, with a recent estimate considering that Bitcoins may have made between 20,000 and 200,000 people millionaires in the last few years! If you are thinking about or already hold investments in digital currency, there are a number of things to bear in mind in respect of your tax and estate planning.
There is a perception amongst some investors that, for whatever reason, Bitcoins and the like are not subject to the same sort of tax considerations as other assets, such as investments in shares or property. Investments in Bitcoins are normally not classed as "income" and therefore would not need to be declared for Income Tax purposes. However, HMRC have a close eye on people who would be classified as "traders". These are people who make frequent trades in crypto-currencies, or who "mine" the currencies, and would become liable for Income Tax on their profits.
The tax that would affect the more casual investors would be Capital Gains Tax (CGT). It doesn’t always occur to people that buying and then selling Bitcoins for a profit would fall into the CGT regime. In the same way that you would be taxed if you bought a painting by an unknown artist and then sold it for much more years later when that artist had just won the Turner Prize, profits made on digital currencies should be declared to HMRC on your tax return and the applicable rate of tax paid.
Remember: the fact that the crypto-currency market is unregulated doesn't mean that they're not subject to tax and HMRC may come after you if they identify you haven't declared what you should have.
And, just like any other asset, Bitcoins and other crypto-currencies will form part of your estate upon your death. The currency will need to be valued as at the date of your death and added to the value of your estate to determine how much Inheritance Tax would be due. Because of the highly volatile nature of the currencies, the value could change radically from one day to the next and therefore it will be important to get a proper valuation to make sure you are reporting the assets accurately to HMRC.
The massive fluctuations in the values of Bitcoins and the like also mean that beneficiaries of an estate might find themselves eventually selling the coins for much lower than the value as at the date of death. If this is the case, it is possible to claim back any excess Inheritance Tax that would have been paid, by effectively requesting that you substitute the eventual sale price for the value submitted for the estate as at the date of death. However, executors and beneficiaries need to take care as excess tax can only be reclaimed if the currencies are sold within a year of death. People who hold on to Bitcoins, hoping for a huge windfall, may find themselves disappointed if they achieve a loss on sale, and are outside the time limit for reclaiming excess Inheritance Tax.
It's not just the tax aspects that Bitcoin investors should be considering. These types of investments are relatively new and the organisations that allow you to buy and sell crypto-currencies may not always have the same formal procedures in place for dealing with the death of a customer as, say, a High Street Bank does. The Internet allows people to invest using organisations based abroad, which may have different requirements to the UK in terms of what they require to release information about any accounts and to transfer the currencies to the beneficiaries. In this country, most organisations will provide information about assets to a personal representative following the production of documents such as a death certificate, Will or Grant of Probate. This is not always the case with organisations based abroad or those which just exist via a website and don't have the same regulations and customer service procedures to which we are accustomed.
Additionally, because of the online nature of digital currencies, many investors will only hold their account information digitally – normally in their email account. That's all very well – but what if you can't access someone's email account after they have died? We're always told not to write down our passwords or leave ourselves logged in but it can be tricky, if not impossible, to get access to someone's digital accounts after they die.
It's easy to get caught up in the fast-paced world of investing in – and hopefully making money on - Bitcoins and other digital currency. But considering the future is also key. If you sign up to a Bitcoin marketplace, find out from them what will happen to your investments when you die. What will they need to pass these on to your heirs? It may also be worth keeping a list of your investments somewhere secure, perhaps with your Will, so your family or friends know what there is and who they need to contact. After all, these are your assets and just because they are unregulated doesn't mean they shouldn't pass on your death in accordance with your wishes.
For more information about lifetime and estate tax planning, please contact Sophie Cisler in the Succession and Tax team.