What happens to Cryptoassets when you die?

Cryptocurrencies are digital currencies including Bitcoin, Litecoin, Ripple, and Ethereum and are controlled independently from a central bank. The currencies use a virtual wallet that contains digital ‘keys’ that are needed to access the currency. The actual currency lives in a digital ledger which is supported by a technology called blockchain. Blockchain is essentially a digital ledger which is extremely difficult to hack, change or cheat. This ensures it’s secure enough to store valuable Cryptoassets.

Whilst there isn’t a concrete legal stance on planning the inheritance of cryptocurrencies, we do know that cryptocurrency is treated in a similar way to other property assets which can be owned, gifted and inherited.

However, it’s not enough to simply include cryptocurrency in your Will. These are the key things to do to ensure the cryptocurrency can be accessed when the Will is being administered:

  1. Include information about your digital wallets in your Will. Never put any specific details about the cryptocurrency in the Will document itself. Once a Grant of Probate has been obtained the will becomes a matter of public record, leaving the information open to fraudsters.
  2. Create a Letter of Wishes with your Will which includes passwords and PINs.
  3. Include a step-by-step guide to explain how your Executors can access your cryptocurrency to distribute, sell or transferred to your beneficiaries.

These steps are extremely important: if a person dies without leaving information about the private keys to the digital cryptocurrency wallet, the cryptocurrency will be lost.

Blockchain is a decentralised and extremely secure process, and there is no way of restoring a private key. Even with a mention in a Will and a valid Death Certificate, accessing the cryptocurrency without the wallet information will be difficult because there’s no central organisation managing these digital wallets to help the Executors and would-be beneficiaries.

There are a number of different ways to store digital wallet information including:

  • A hot wallet – the private key is kept online. The risk here is that it may be targeted by fraudsters;
  • A cold wallet – where the key is written on paper, kept on a USB stick, or an offline computer. All of these can be stored in a safe for security;
  • A hosted wallet – where the private key is held by a third-party service; or
  • Banks – some banks allow cryptocurrencies to be bought and sold from a new bank account. They also store wallets and private keys of behalf of clients.

There is no central organisation in charge of these digital wallets, so although the person’s Executors might be able to prove who they and can provide copies of the Death Certificate and Will, it doesn’t help when there is no organisation or regulator to take this information to. The current total market value of cryptocurrencies is estimated at £1.75 trillion worldwide, so failure to plan for the succession of these types of assets appropriately could cost your Estate significantly.

The UK’s approach to taxation of Cryptocurrency

A cryptocurrency is a digital virtual currency which uses encryption technology, or cryptography in its creation to ensure the security of transactions involving its use. The original was Bitcoin, but there are many others including Dogecoin, LiteCoin and Ripple.

Over the past year or so, many types of cryptoassets have gained value and popularity as an investment option. Tesla Billionaire Elon Musk famously invested $1.5 billion in Bitcoin, and was credited with raiding the prices of Bitcoin and other cryptocurrencies through Twitter.

The UK’s approach to taxation of Cryptocurrency

As cryptocurrency investment levels and usage increases, global regulators are yet to establish a coherent approach to taxation across all jurisdictions.

There is a school of thought that disposal of crypto assets can be likened to gambling or lottery type winnings, however, this is not correct.

Cryptoassets aren’t treated by HMRC as a currency or money, with HMRC stating that ‘A trade in crypto asset exchange tokens would be similar in nature to a trade in shares, securities, or other financial products’ with case law which treats share trading as a benchmark for the tax treatment of crypto.

In the UK, cryptoasset gains (for Capital Gains Tax) are measured at the point the cryptoassets are sold, including when one currency of cryptoassets is exchanged for another (e.g., exchanging Bitcoin for Dogecoin) so unless there is a disposal there will be no Capital Gains Tax due. HMRC’s guidance notes state that whether tax applies will hinge on whether trade is being carried on. If the buying and selling of exchange tokens amounts to a trade will depend on factors which include frequency, level and type of the organisation and the intention of the exchange.

If it’s determined that the exchange(s) amount to trade, the receipts and expenses become a part of the calculation of the trading profit of that individual or company. This means that the profits from the trade will be also be subject to Income Tax.

For Individuals:

For individuals who are not trading there is a tax-free Capital Gains Tax allowance of £12,300 during the current 2020-2021 and subsequent 2021-2022 tax years. Additional gains will be taxed at either 10% or 20%, but this will depend on the level of the individuals other income.

Finding that an individual’s activities amount to trading, and therefore subject to Income Tax, is unusual. However, if the activity is considered to be trading then for individuals’ Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses). The amount that needs to be paid will depend on the individual’s other income.

What about businesses?

For businesses trading in cryptoassets, the profits or losses will form part of the trading profits instead of being a chargeable gain for Capital Gains Tax.

Because crypto isn’t treated as a currency, companies are likely to exchange tokens as ‘intangible assets’ which will be taxed under Corporation Tax rules for intangible fixed assets if the token is an ‘intangible asset’ for accounting purposes and an ‘intangible fixed asset’ which means the asset has been created or acquired by a company for use on a continuing basis. However, if the tokens are held by the company, they will not meet this definition.

When the gains and losses are calculated from the disposal of crypto tokens, not all costs will be allowable as a deduction, as governed by Section 38 of the Taxation of Chargeable Gains Act 1992. HMRC’s view is that deductible costs include:-

  • The consideration (in £ sterling) originally paid for the asset;
  • The transaction fees paid for having the transaction included on the distributed ledger;
  • Advertising for a purchaser or vendor;
  • Professional costs to draw up a contract for the acquisition or disposal of the tokens; and
  • Costs of making a valuation or apportionment to be able to calculate gains or losses.

These will be deducted against profits for Income Tax will not be allowable as deductions for Capital Gains Tax. VAT will also be due in the normal wat on goods or services sold in exchange for cryptoasset exchange tokens.

Sources:

Financial Times: https://www.ft.com/content/ec2dc503-467a-4627-b35c-1c5aebb65010

Accountancy Daily: https://www.accountancydaily.co/hmrcs-cryptocurrency-tax-treatment-introduced-without-law

HMRC Cryptoassets Manual: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual

 

The 25th May GDPR deadline is fast approaching – are you GDPR ready?

The potential effects and sums involved for non-compliance, which is up to €20 million or 4% of annual net revenue for serious breaches, means that everyone is taking the new GDPR seriously.  But many smaller businesses are only now looking at what needs to be done.

It’s not too late however, and GDPR does not need to be too daunting. For the most part, GDPR will not be too onerous as long as the correct procedures have been put into place.  This means putting in the leg work now to ensure compliance in time for the deadline.

What does it mean for you?

Companies will fall into one of two definitions, data controllers and data processors.

A data controller is the person or company who determines the purposes for which, and the manner for which, any personal data is processed.

Data processors are people or companies who process personal data on behalf of a data controller. (Employees of data controllers are excluded from this definition).

A substantial amount of companies will fall into the data controller category, with which I deal with here.

GDPR – the mantra

Consent must be;

  • Informed;
  • Freely given
  • Clear and concise.

For consent to be informed, the data subject should be aware of at least the data controller’s identity, what the data collected will be and how it is collected and the intended purposes of the processing.

If consent is given in the context of a written document that also concerns other matters (such as a contract or T&C’s), data controllers must present the requirement to give consent to the processing of personal data in a way that is clearly distinguishable from these other matters.  The data controller should not make consent a determining factor of entering into said contract.  Companies should therefore review their contracts, terms and conditions and other documents to ensure that the section on consent is clearly identifiable and clearly written with information on how to withdraw consent (and the right to be forgotten or how to amend your details) at any time being given.  

Silence, pre-ticked boxes or inactivity should not normally constitute consent. When the processing has multiple purposes, consent should be given for all of them.

Form of consent

A statement can include a written statement (including by electronic means) or an oral statement (although it is highly advisable that written statements are used so that these can be kept and evidenced).

Examples of affirmative actions include:

  • Ticking a box when visiting a website;
  • Choosing technical settings for an online service;
  • Pressing a specific button to continue a call, once you have been made aware of the data policy;
  • Any other conduct which clearly indicates in this context the data subject’s acceptance of the proposed processing of their personal data.

Withdrawal of consent

Data subjects have a right to withdraw their consent at any time (although this will not affect the lawfulness of any processing carried out before the withdrawal).  Data subjects must be informed of their right to withdraw their consent and consent must be as easy to withdraw as it is to give. This is likely to affect the practice where the granting of consent is made easy for users, for example by ticking a box on a website, but the withdrawal of consent requires an email or even a postal notification. Ideally, granting consent and withdrawing consent should be made in the same way i.e. by clicking on a link/ticking a box.

GDPR for employees

Employers hold a large amount of data (some sensitive data) about their employees.  In the same way that clients and customers have the right to know what data is being held, by whom and why, so do employees.

The requirements for this vary somewhat in that an employer must be allowed to hold and use some of this data for its employees in order to carry out its primary function, that of employing and paying its staff. However, a separate privacy policy is advisable rather than a paragraph in an employment contract.  The policy should contain all of the information as to what data is collected, how it is obtained, what is done with it and detail an employees’ rights in respect of this.

General matters

Aside from the various documents, wording and policies a business will need to ensure it is GDPR complaint, businesses will need to also consider the practicalities of ensuring its internal processes are up to scratch – such as storing and keeping data secure.  An internal system for running their database will need to be set up. Businesses will also need to ensure that any third parties, service providers or suppliers are compliant so a review of its contracts with, for instance, outsourced payroll companies is crucial.

If you need assistance with getting your business ready for GDPR, please contact Ilinca Mardarescu.

An AI Just Defeated a Group of Lawyers

AI has taken a big swing at chess players, poker players, go players and now lawyers! A showdown between some of the best lawyers in the world and an AI intelligence platform LawGeex, over an interpretation of contracts resulted in the humans losing, again.

The challenge had twenty lawyers go up against the AI platform in consultation with law professors from Stanford University, Duke University, School of Law, and University of Southern California – both were given four hours to review five non-disclosure agreements (NDAs), identifying 30 legal issues, this included things like arbitration, confidentiality of relationship and indemnification. The scoring happened by accuracy in indemnifying each issue.

Humans took another tumble against the rising force of smart machines with an 85% accuracy rate. The AI smashed that out of the water with 95% accuracy. What makes this even scarier is it took the humans 92 minutes on average, but the AI completed it in 26 seconds.

This is a task lawyers undertake daily, but this still didn’t assist in the competition. The AI scoring the highest result achieved 100% accuracy in one contract, against the human whose highest result is 97%.

So, what does this mean for the legal industry?

When a computer can complete intricate and complicated jobs like this, it’s easy to see the threat posed to the industry as a whole, we see the looming threat of computerised legal offices dealing with every need in mere moments, but it’s not as dystopian as that.

“Having the AI do a first review of an NDA, much like having a paralegal issue spot, would free up valuable time for lawyers to focus on client counselling and other higher-value work,” said Erika Buell, clinical professor at Duke University School of Law, who LawGeex consulted for the study. 

These tools will come into the market, and there is a place for them, but like the computer on your desk it’s simply a tool and will only serve to make the process easier and quicker for both the solicitor and their clients. We feel there’s only good to come from this, but it’s a fascinating step into the future at the very least!

Online Court: E-Justice

Critics of the UK Judiciary argue it is outdated, overpriced and no longer fit for purpose. This comes with the growing number of people being un-able issue legal proceedings because of the near abolition of legal aid. The disproportionate legal costs which come concurrent with legal representation have led to a drastic increase in people representing themselves. Continue reading “Online Court: E-Justice”

UK Surveillance Bill – Is Big Brother Watching?

Theresa May admitted in the House of Commons, on the 4th of October 2015, that the UK had been operating mass domestic surveillance since the ‘1984 Telecommunications Act’. The irony of course, is that ‘Nineteen Eighty Four’ is the title of George Orwell’s dystopian future novel which hinges upon the governmental surveillance of British civilians (or Airstrip One – as the book calls it).  An irony Edward Snowdown also couldn’t help but enjoy. But could this be as bad as the literary classic predicted? Continue reading “UK Surveillance Bill – Is Big Brother Watching?”

Five Dangers of Employees Bringing in their Own Devices

Bring your own device (BYOD) schemes are being introduced across the country as a result of the benefits and advantages they bring to both employers and employees. However there are inherent risks that both parties should be aware of. This article briefly outlines – what we perceive to be – the 5 main dangers of a BYOD scheme. Continue reading “Five Dangers of Employees Bringing in their Own Devices”

Chicago being sued over Netflix tax

You may of heard that the city of Chicago (possibly having some financial trouble and a creative finance team) had decided to place an ‘amusement tax’ on Internet related services, this not only means streaming services like Netflix and Spotify but also gaming services like PlayStation live or World of Warcraft will have to jump their prices to Chicago subscribers. Continue reading “Chicago being sued over Netflix tax”