I recently acquired my very first cryptocurrency assets. I wish to use these, in due course, to support charitable causes. However, I am still getting to grips with “virtual assets” and the legal implications in areas such as tax.
What happens if I want to use my currencies to donate to charitable causes — as is actively encouraged by Save the Children? Are these cryptocurrency gifts classified as tax deductible?
Sarah Williams, legal director at the charities team at BDB Pitmans, says crypto assets are digital representations of value, for example cryptocurrencies. They are otherwise known as “exchange tokens” or non-fungible tokens and are rapidly moving into the common lexicon.
As more people access this technology and owning or selling a variety of different tokens (some for multimillion dollar figures), it is not surprising that the potential to use crypto assets for philanthropic purposes is rising up the agenda.
The US is ahead of the UK charity sector, with the IRS confirming that virtual currencies such as cryptocurrency are treated as property; they receive the same tax treatment in the US as stocks.
It is therefore not surprising that an increasing number of global charities (typically based in the US), such as The Water Project and Save the Children, are actively promoting the gifting of crypto assets. Unicef launched a new vehicle in October 2019 allowing it to receive, hold, and disburse cryptocurrency — hailed as a first for the UN.
While the UK may be heading in the same direction, the treatment of crypto assets remains fluid, with tax policy evolving as the sector develops. HM Revenue & Customs does not consider crypto assets to be currency or money and its treatment of crypto assets depends on the nature and use of the token in question.
A gift of cryptocurrency won’t, therefore, qualify for gift aid and whether the gift of a crypto asset to a charity would be tax deductible will depend on the type of asset being donated. Different crypto assets attract different rules and, if your crypto assets are held as personal investments, HMRC guidance indicates that you may need to pay capital gains tax when you make a disposal.
You may be eligible for relief on capital gains tax if you give to charity assuming that the relevant cryptocurrency is treated akin to shares — in terms of relief on donations — but you will need to take advice.
Leaving the tax position to one side, you will need to check with your chosen charity whether they are geared up to receive cryptocurrencies. Although some charities in the UK have adapted to this type of giving, such as the RNLI (which receives bitcoin under a pilot scheme) and the Children’s Heart Unit Fund, the willingness and ability of charities more generally to accept crypto assets cannot be taken for granted and they may prefer to receive a cash donation.
There are also significant environmental concerns around the energy consumption involved in the associated mining process, so engagement with crypto assets may not be viewed as entirely benign. Like you, charities are still grappling with the world of virtual assets so you can expect to see further developments in this area.
Should I worry about CGT changes?
A government move to raise capital gains tax (CGT) feels inevitable. As a business owner, what sort of things should I be thinking about?
Julia Rosenbloom, tax partner at Smith & Williamson, says changes to the tax system are inevitable as the government looks to balance its books and rebuild the economy following the pandemic.
Reform to CGT could happen as early as the autumn, if the chancellor holds another Budget then. This could include an increase in CGT rates so they align with income tax rates and a restriction on business asset disposal relief (BADR) which business owners can currently access on a sale of their business. BADR can halve the rate of CGT payable from 20 per cent to 10 per cent on the first £1m worth of gains.
For example, if a business owner spends £100,000 creating their business, builds it up and subsequently sells it for £600,000, their gain is £500,000 and they may pay as little as £50,000 in CGT.
A withdrawal of BADR coupled with an alignment of CGT rates with income tax could increase the CGT payable from £50,000 to as much as £225,000 (assuming a 45 per cent rate).
If you are considering selling your business in the near future, you may want to consider accelerating the sale so it takes place under the current CGT regime. However, commercial factors must also be considered. If your trading has suffered during the pandemic, you may not be able to get the best price.
You may want to consider taking the opportunity to accelerate transferring wealth to the next generation or you could create a family wealth fund. If, for example, you transferred a business to a family trust, CGT should be due on the transfer at the current rates. If the business is subsequently sold to a third party, additional CGT will only be payable on any increase in value from the date of the transfer. You would effectively be accelerating the CGT charge but at what may turn out to be a much lower CGT rate. Anyone doing this, however, needs to be sure they can cover the CGT liability arising from the transfer, whatever happens with the business. Professional advice is essential.
Many business owners rely on an ultimate sale to fund their retirement. Tax increases could jeopardise the standard of living you may have been expecting. Lifelong financial planning could take this into account and pensions, Isas and general investment planning should sit alongside your business objectives.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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