By their nature, digital assets don’t always have a physical location. Russell Kaminski looks at how that can affect how they are taxed

Russell Kaminski

The recent crash in the value of cryptocurrency has highlighted the importance of being alive to the tax treatment of cryptoassets in general. Professional advisers need to understand the tax treatment of cryptoassets to advise clients effectively. Cryptoassets are no longer seen as just a passing fad, rather, we are now seeing many clients who hold at least one form of cryptoasset. 

This article focuses on the availability of the remittance basis of tax treatment for non-domiciled UK-resident taxpayers on foreign gains arising on cryptoassets.

Many commentators had previously suggested that non-domiciled UK-resident individuals might be able to rely on the location of the key / passwords – which could be strategically located abroad – to benefit from the remittance basis of tax arising on any gains on a disposal of those assets.

It had been suggested that those individuals could potentially benefit from storing the physical access codes or hard drive wallets in those foreign countries with more favourable tax regimes. However, HMRC’s guidance makes it clear that it is not necessarily the case and the location and specific type of cryptoasset will be key for determining how the assets are taxed ( 

For those claiming the remittance basis, it is fairly clear-cut for most assets whether gains arising can be classed as foreign. However, the distinction is much less clear where cryptoassets are concerned. 

As they are digital by nature, cryptoassets do not have a physical location. In order to determine its location, for the purposes of assessing its tax treatment and the applicability of the remittance basis on gains arising on such assets, we must look to the notional location of the cryptoasset.

Notional location

To determine the notional location, it is necessary to distinguish between cryptocurrencies where there is an underlying asset, and those where there are none.

Underlying assets

If there is a physical underlying asset, and the cryptoasset is merely a digital representation of that underlying physical asset, then it is the physical location of the asset that determines the location of the cryptoasset.

HMRC’s manual gives a helpful example of a limited company that buys and sells gold bullions on behalf of clients. The company issues a digital token to represent the physical gold bars. HMRC’s view is that we must look to the location of the physical bars of gold, not the digital tokens, in order to determine the location of the asset. This is because the underlying asset is the gold bar, not the token representing it. 

If, therefore, the gold bars were physically located in the UK, but the tokens issued and located abroad, the gains would not be classed as foreign and the individual concerned would be taxed under the usual capital gains tax (CGT) rules applicable in the UK on any gains.  

No underlying asset 

It’s interesting that a distinction has been made by HMRC in relation to those cryptoassets where there is no underlying asset per se – where, for example, it is the token itself that has value. Its view is that exchange tokens have an intrinsic economic value as they can be traded for goods and services. 

However, it considers that such cryptoassets are not currency or money. Rather HMRC’s manual states that exchange tokens “are a new type of intangible asset (different to other types of intangible assets, such as shares or debentures)”. Cryptoassets are therefore treated as property when it comes to CGT.

Where there are no underlying assets (for example, cryptocurrency such as bitcoin), HMRC will look to identify the location of the beneficial owner of the exchange token. This means that the residency of the beneficial owner will be used to determine the location of the cryptoasset for tax purposes, and not the location of the access codes / passwords for the cryptoasset. 

The outcome of this is that UK tax will be payable on the exchange tokens where an individual is UK-resident (even if they are non-domiciled).


The above also raises the question of whether the tax treatment would be any different for non-fungible tokens (NFTs).

An NFT is a unit of data stored on the blockchain which confirms that a digital asset is unique. Common examples include: digital artwork, event tickets and domain names.

It follows, therefore, that NFTs would, by definition, fall into the “no underlying asset” category. Therefore it will also be the location (residency) of the beneficial owner and not the location of the asset itself that is used for the purpose of inheritance tax and CGT.