Cryptocurrency Investigation - HEX Token

Crypto Tax | HMRC Enquiries

A married couple who had invested in HEX cryptocurrency faced an enquiry from HMRC regarding the tax treatment of their holdings.

HEX is a controversial cryptocurrency that has generated both significant returns for early investors and considerable debate about its nature and value. HMRC's enquiry raised questions about both the acquisition of the tokens and their subsequent treatment.

The tax treatment of cryptocurrency depends on the specific facts and the nature of each transaction. HMRC's cryptoassets manual provides general guidance, but the novel features of tokens like HEX mean that the analysis is not always straightforward.

The key issues in this case were:

Acquisition: HEX was initially distributed through a "free claim" process, where holders of other cryptocurrencies could claim HEX tokens. HMRC's enquiry questioned the cost base of tokens acquired in this way. If they were acquired for nil consideration, the entire proceeds on disposal would be a gain.

Staking: HEX features a staking mechanism where tokens can be locked up to earn rewards. The couple had staked their HEX and received staking rewards. HMRC's enquiry questioned whether these rewards should be treated as income (taxable when received) or capital (taxable only on disposal).

Valuation: HEX has been subject to extreme price volatility and questions about the reliability of price data. HMRC's enquiry raised questions about how disposals should be valued.

We prepared a comprehensive response addressing each issue:

On acquisition, we analysed the mechanism by which the couple had obtained their HEX tokens and set out to HMRC what we believed should form the allowable cost base.

On staking, we analysed the HEX staking mechanism in detail, explaining how it operates technically and arguing that the rewards were more analogous to capital accretions than income payments. We supported our analysis with references to HMRC guidance on similar arrangements.

On valuation, we identified reliable sources of price data and explained our methodology for valuing disposals.

We also addressed the wider context, noting that HEX has been the subject of controversy but that this did not affect the application of established tax principles.

Our clients had invested in good faith and were entitled to have their tax position determined by reference to the law, not by reference to HMRC's view of the merits of particular investments.

The response ran to over twenty pages and was supported by extensive documentation, including blockchain records, exchange statements, and explanatory materials about the HEX protocol.

Outcome

Comprehensive technical response submitted to HMRC addressing all aspects of the enquiry. Detailed analysis of HEX token mechanics provided. Cost base established and staking treatment argued.

Matter has fallen into a seemingly never ending review with HMRC!

This case study is based on a real client matter. All identifying details have been removed or changed to protect client confidentiality.