Cryptoassets, although being completely intangible, are currently white-hot property. They began with the person/persons named Satoshi Nakamoto publishing a paper in October 2008 entitled Bitcoin: A Peer-to-Peer Electronic Cash System, which set out a vision of commerce transacted between parties with cryptographic proof of transactions, rather than requiring those transactions to take place on trust or via a trusted third party, such as a bank. This is done by the creation of a distributed ledger of transactions (called the blockchain) which is held on computers around the world and is updated simultaneously on all copies of that ledger whenever a transaction is recorded in it.

A person holding Bitcoin or other cryptoassets has a public key (a string of electronic data visible in that ledger) and a private key (a string of electronic information confidential to them and which should be stored safely and away from the public key – preferably in a non-internet accessible mode (a piece of paper in a locked box is perhaps safest!). To record a transaction on the blockchain where a person providing goods or services is happy to accept Bitcoin or similar in exchange, the purchaser combines their private key with their public key and directs the agreed share of Bitcoin (as any fraction can be transferred) to the vendor, who then also receives a fresh and randomly-generated private and public key, with the transaction being recorded on the distributed ledger/blockchain by the transferee authenticating the transfer. That transaction then becomes historic and cannot be revisited. If the purchaser of the goods retains Bitcoin, they then also receive a new private key and their public key will be modified. The identity of the person, company or entity holding cryptoassets on the blockchain are often not recorded and transactions take place by reference only to anonymous computer address identifiers. These are ‘on-chain’ transactions. ‘Off-chain’ transactions can also take place where, for example, someone transfers their private key to another outside of the blockchain. The new holder of the private key then has control over the asset.

Currency or property?

It is now well-established that cryptoassets are considered in English law to meet sufficiently the relevant criteria to be defined as property, namely that a right in or affecting a thing must be:

  • definable;
  • identifiable by third parties;
  • capable in its nature of assumption by third parties; and
  • have some degree of permanence or stability (National Provincial Bank v Ainsworth [1965] AC 1175).

The question of permanence or stability may remain moot, since a transfer of cryptocurrency from one person to another, in fact, necessitates invalidation of the previous ‘holding’ of it and creation of a new ‘holding’, as the previous block on the blockchain which recorded the earlier transaction becomes historic, immutable and irreversible. (Note that the top six transactions on the chain are vulnerable to revision for a few hours until the distributed ledgers are fully updated and consensus is achieved.) The UK Jurisdiction Taskforce stated, however, in November 2019, that the assets are as permanent as other conventional financial assets which only exist until they are cancelled, repaid, redeemed or exercised.

The effect of cryptoassets being defined as property is that an interest in them can be enforced against the whole world, as opposed to personal rights, which are enforceable only against someone who has assumed a relevant legal duty in respect of them. If one has proprietary rights, they can be protected by injunctions, tracked down/traced, take priority over others asserting rights over the thing, and recovered where they have been unlawfully taken from the owner of the proprietary right.

To date, cryptoassets have been accepted as property and have afforded their owners proprietary remedies in England and internationally (see Robertson v Persons Unknown (Unreported, 15 July 2019, Moulder J); AA v Persons Unknown who demanded Bitcoin on 10th and 11th October 2019 [2020] 4 WLR 35 (proprietary injunction granted); Quoine Pte Ltd v B2C2 Ltd [2020] SGCA(I) 2; Ruscoe v Cryptopia Ltd (in liquidation) [2020] NZHC 728). The lessons learnt from these cases have been considered and expanded upon by Byron James and Andrzej Bojarski in their excellent Family Law Week article, Cryptocurrencies and Cryptoassets: Freezing Orders, Disclosure Orders and the Instruction of Experts, which includes useful proposed precedents.

Other jurisdictions treat cryptoassets, however, as currency, rather than property. Italy, by legislative decree 90 of 2017 (amending the implementation of EU Directive 2015/849 (IV Anti-Money Laundering Directive)) imposed the same regulations on crypto-currency exchanges as apply to traditional money exchanges, thus treating those assets as a form of foreign currency, although they are defined as a ‘digital representation of value not issued by a central bank or public authority’ and so are not declared by any recognisable authority as legal tender.

With their different definitions in different jurisdictions, cryptoassets are treated differently for legal and taxation purposes, and lawyers are well-advised to bear this in mind and take appropriate local advice, particularly where the client has international interests.

Taxation issues

In England and Wales, HMRC has been active in assessing how cryptoassets might be chargeable to tax. In December 2018 HMRC issued a paper and in April 2021 a manual which all lawyers dealing with such assets ought to consider. In short:

  1. Cryptoassets held as a personal investment for capital appreciation in value are liable to capital gains tax upon disposal (including exchange of one cryptoasset for another) of those interests. Any transaction or transfer of value will result in a chargeable disposal at the transferor’s marginal rate unless a relief or an exemption applies.
  2. Cryptoassets received from employers as a form of non-cash payment or from cryptoasset mining (cryptoassets awarded for verifying additions to the blockchain ledger), transaction confirmation or airdrops (where someone receives an allocation of cryptoassets as, for example, part of a marketing campaign or advertising, but where they do not receive them as a gift) are subject to income tax and national insurance contributions.
  3. Cryptoassets held by a deceased person form part of their estate and are relevant for inheritance tax.
  4. Where cryptoassets received as income per (2) above are disposed of, then they are treated as capital and gains/losses are taxed accordingly.
  5. Taxation of cryptoassets is based on the holder’s residence in the UK. This is relevant for resident individuals who are non-domiciled for tax purposes. If cryptocurrency is bought with gains made off-shore by someone making use of the remittance basis of taxation, then the cryptocurrency transaction is considered remitted for UK tax purposes and charges arise.
  6. HMRC considered that it would be exceptional for individuals to buy and sell cryptoassets with a frequency, level of organisation and sophistication that amounts to financial trading. In light of the creation of exchange traded funds, then that assumption may require revision. If an individual engages in that activity, then income tax takes priority over capital gains tax and will apply to profits and losses, as it would be considered a business.
  7. Losing a private key (so losing the ability to access the cryptoasset and thus losing the asset itself) does not count as a disposal for capital gains tax purposes. If there is no prospect of recovering that private key, then a negligible value claim can be made, which, if accepted, means that the individual is treated by HMRC as having disposed of and reacquired the same asset (that they cannot access) so that a loss can be crystallised.
  8. Being a victim of fraud or theft of a cryptoasset does not amount to a disposal and the individual cannot claim a loss for capital gains tax. The individual still owns the asset and has a right to recover it. If someone pays for and receives cryptoassets which turn out to be worthless, they may be able to make a negligible value claim to HMRC.
  9. Individuals are well-advised to keep separate records for each cryptoasset transaction as cryptoasset exchanges may only keep records for a short period.
  10. Cryptoasset values must be converted into pounds sterling for inclusion on tax returns and the value methodology must be recorded and kept for consideration by HMRC.
  11. Cryptoassets cannot be used to make a tax-relievable contribution to a registered pension scheme as they are not considered to be currency or money.

Clients who decide to hold and/or invest in cryptoassets are well advised to consider their tax position carefully. In general, gifts/disposals to spouses and family members will have the same tax consequences as transfers of any other property.

Orders and enforcement

Cryptoassets have appeared in lawyers’ caseloads with increasing frequency, but what can one do with them? Sometimes, they form the most significant capital asset, or one party may receive employment income or incentives/bonuses in the form of a cryptoasset. How should that be treated?

As cryptoassets are property, property adjustment orders pursuant to s 24 Matrimonial Causes Act 1973 or property transfer orders pursuant to s 2(1)(c) Inheritance (Provision for Family and Dependants) Act 1975 may be made. This will be a chargeable disposal for capital gains purposes unless an exemption or relief applies.

Maintenance orders and legal services provision orders may be made where the holder of the cryptoasset is required to transfer a sum equivalent to a fiat currency sum, valued on the date of transfer, to the other party, or otherwise is required to liquidate a proportion of the cryptoasset equivalent to a fiat currency sum and to pay that fiat currency over to the other party (both of which will involve a taxable disposal). Accountancy advice should be taken as to whether for the payee this amounts to chargeable income, and/or whether for the payer the draw down or transfer to the other party should be treated on each occasion as a disposal for the purposes of capital gains tax.

In all circumstances where a person resident in the UK, but non-domiciled for tax, transfers cryptoassets to the other party of the court order, the parties and the court must be aware that the transfer itself will be taxable, even if the transaction at first glance takes place off-shore.

If a person anticipates that their registered legal partner or otherwise a trustee (constructive or express) is likely to dispose of their cryptoasset then freezing injunctions may be obtained.

If a person potentially liable to a duty to preserve the cryptoasset while litigation or negotiation continues does, in fact, dispose of it, then there are tracing firms such as Chainalysis, Elliptic and CipherTrace who can, by comparing movements in the public keys of assets and patterns, trace cryptoassets diverted by a party (or perhaps stolen by a hacker or blackmailer). Such orders can be made in conjunction with freezing orders. The reader should note that HMRC has invested and is further investing in tracing software and has requested disclosure of account holder information from cryptoasset exchange platforms, which those platforms are obliged to keep and produce to appropriate authorities.

But what if the holder of the cryptoasset refuses or fails to comply with the order made? If there are other assets held by the transgressor, then enforcement may take place against those assets. But if there are not, the aggrieved party is in an invidious position with the only apparent tools to hand being committal, appointment of a receiver where that might make a difference, or otherwise an order to obtain information from a judgment debtor. Although this may be a route to obtaining compliance with the order, it may be a fruitless exercise.

Legal policy makers and legislators urgently need to take steps to create a method of requiring a holder of cryptoassets to secure their private key in a neutral place to the satisfaction of all parties and the court, pending the outcome and satisfaction of litigation. While the holder of the private key has sole control, then the law, in its current state, is too insubstantial in its effect in the face of an unrepentant transgressor.