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Blockchain cryptocurrency token coin design

FTX: What now for advisers?


When a cryptoasset exchange collapses, what can accountants do to help their clients? Crypto experts Dion Seymour and Laura Knight consider advisers’ options.

25th Nov 2022
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Following this publication’s recent article on the failings of cryptocurrency exchange FTX, the news has continued to keep us on the edge of our seats. It is easy to become caught up in the drama, particularly when we have clients and friends that are adversely affected, but as advisers we need to take a step back.

Here we consider what accountants can do to help their clients. FTX is not the only exchange that has failed and is unlikely to be the last. We use a fictional case study to explore the issues and answers, together with snippets that relate this to current real-world circumstances.

Fictional case study

WobbleCoin is an exchange that trades in the usual cryptoassets, such as Bitcoin, and it has created its own (native) cryptoasset JabbaCoin. To date, no tokens have been airdropped (provided free to encourage adoption). It is announced that WobbleCoin is in trouble and may become subject to takeover or worse, bankruptcy. Following this, the JabbaCoins, which were worth £10 per token, are now only worth a fraction of a penny following a court statement that the CEO misappropriated funds.

The first thing the client must do is download records. It must be stressed to them that, in the absence of records, demonstrating loss will be difficult.

The first question for an accountant to consider is: what is the asset?  This is not straightforward. The starting point is to look at the terms and conditions (which can usually be found on the exchange/platform’s website). The T&Cs usually shed light on whether the client actually owns any tokens, or whether they own a right against WobbleCoin. The rights and interests that the client possesses will determine the remedy they can pursue. This may also have an impact on their tax position.

It must be noted that a review of T&Cs can be further complicated by the fact that many exchanges or platforms vary the T&Cs over time and without warning. Clients should check emails to obtain historic copies of T&Cs where possible.

As a result, conclusions may need to be drawn on the basis of best judgment. HMRC may question how the view was arrived at. However, they would need to demonstrate why the accountant’s view is incorrect.

HMRC does not consider cryptoassets to be money or, more accurately, not sterling. This means any JabbaCoins or Bitcoins owned are assets for capital gains tax (CGT) purposes. This makes a negligible value (NV) claim under s.24 TCGA92 possible, but a different approach is required for the two types of tokens.

Following the fall in value for the JabbaCoin tokens, an NV claim can be considered.  CRYPTO22450 states that for an NV claim to be made the tokens have to be worth “next to nothing”. A claim is not possible just because the asset has fallen in value since it was acquired. Other conditions apply, for example, if there is still a market, and HMRC has been known to take a hard line on these matters. 

In the real world

Back in the real world, the tokens from collapsed exchange FTX (called FTT) still have a notable value and there still seems to be an active market (so not quite fitting into the NV claim).

The position for bitcoin is very different. Despite the CEO of WobbleCoin stealing tokens, it is not HMRC’s view that this is a disposal (although others may have a different view).  As discussed at CG13155, with the client still having the right to recover the Bitcoin, the original interest has not been lost. The position is different if there is no likelihood of recovery, making an NV claim under s.24(2) TCGA92 competent.

Back in the real world, it should be noted that, in the case of FTX, recovery on any grounds is far from clear at the moment.

However, for all NV claims there needs to be the loss of the whole asset. For cryptoassets (and other fungible assets) this presents a complication. As cryptoassets have to be pooled under s.104 TCGA92 they become part of a pool regardless of “where” they are owned and s.24 TCGA does not allow for a part disposal. Therefore, if the client had other Bitcoin elsewhere (not at FTX!) there would not be the loss of the whole asset, making an NV claim not possible.

This is an unhelpful outcome. HMRC has accepted that NV claims are possible where there is a lack of recovery. Indeed, it says at CRYPTO22400 that an NV claim may be made in the event of a private key being lost. However, this seems to be a more mechanical outcome from existing legislation, rather than a policy intent. Unfortunately, this is a point missed in the crypto guidance as it does not indicate that the loss of the whole asset in the pool is required. 

The position is different if the T&Cs of WobbleCoin showed the client never owned any tokens but instead owned a right against WobbleCoin. That right is likely to be an asset for CGT purposes, being either a contractual right or right of action. An accountant will want to consider whether the right against WobbleCoin has become of NV so that a s.24(2) TCGA92 claim can be made.

Hypothetical question

Finally, there is a hypothetical question, if the asset even still exists. The UK Jurisdictional Taskforce statement on cryptoassets and the Law Commission’s recent Digital Assets consultation paper proposes a view that when cryptoassets are transferred, or used, the original asset is extinguished and a new one created. This could mean that when the CEO of WobbleCoin stole the assets the Bitcoin was destroyed (and should be removed from the s.104 TCGA92 pool) and a new asset was created; a right against WobbleCoin (which would not be the same as Bitcoin, so not pooled). If this is the resulting view then the above logic would seem sound, however, it may have potentially horrendous consequences for both the client and HMRC from a compliance angle.

With no tokens being airdropped, there is no miscellaneous income tax to consider. However, if there had been an airdrop, income would be due on the tokens at their value at the time of receipt with some difficult outcomes. However, an analysis of the issues here is outside the scope of this article.

Unfortunately, the headaches are not over for FTX, sorry, WobbleCoin customers just yet.

Replies (6)

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the sea otter
By memyself-eye
25th Nov 2022 15:26

I thought a 'wobble coin' was where you spin an old penny on a table using thumb and forefinger to fool a child (who doesn't see the thumb actually spin the coin) Maybe Crypto is the same a sleight of hand and its' adherents ARE gullible children.....

Actually, not 'maybe' but 'I'm certain'

Thanks (1)
Replying to memyself-eye:
By JustAnotherUser
25th Nov 2022 15:57

I am curious, if someone walked in off the street and told you they have income of £100k in crypto and NFT's, would you take them on as a client?

Thanks (0)
Replying to JustAnotherUser:
By Paul Crowley
25th Nov 2022 16:13

Only if they intended to declare it.
You said income, not gain on disposal of.

The problem of crypto 'trading' really is the massive record keeping when buying crypt A with crypt B on a daily basis

Thanks (1)
Replying to JustAnotherUser:
By Moo
01st Dec 2022 13:25

Well it might be interesting to have a conversation with them to find out how they have been financing their crypto habit.
They might be worth taking on because they have substantial fiat assets and / or income, hopefully not proceeds of crime or money laundering.

Thanks (0)
By JustAnotherUser
25th Nov 2022 15:56

"if there is still a market" Even the failed Luna has a 24 hour trading volume of $34,621,987

Good read, but suspect this will go way over the tulip-pushers heads and be dismissed.

"Here we consider what accountants can do to help their clients"

If your advising on crypto, and these clients have enough disposable income to trade in large enough volumes of crypto, they shouldn't be sat on an exchange, let alone one such as FTX.

If you can buy at a penny and sell at a pound, you can buy at a pound and lose when they hit a penny, welcome to crypto.

If you are unfortunate to have a client with large volumes on a failed project, you can always sell on a (DEX or CEX), even at a fraction of a penny, few coins 'disappear' so this should be ok for an NV claim / CG Loss...if you can access the platform, this article covers the 'if not' well.

As they say "not your keys, not your crypto" stop storing large amounts on exchanges people.

If you're an accountant you wouldn't take on a premier league footballer if you're primarily dealing with sole traders, crypto is a specialist special for your clients, be an expert in the field not just on the taxes.

Thanks (2)
By Moo
01st Dec 2022 13:30

Interesting article Dion and Laura.
In view of the predicted meltdown in cryptoland and likely deluge of heavy losses I wonder whether HMRC might revise its view that these 'investments' are subject to CGT and reclassify most transactions as the gambling that many of considered them from the start?

Thanks (0)