Cryptocurrencies are in the news again. The recent rises (and falls) in value, the now highly significant amount of crytoassets being traded and the interest shown by some high net worth individuals and companies have generated many discussions and column inches; be it investment opinions, short or long term strategy, or tax advice.
I have been advising clients and writing articles on the tax implications of cryptocurrency since 2017. The tax treatment of cryptoassets is now suddenly in sharp focus with the stark realisation amongst a number of crypto investors that taxes may be due. This has come about partly because of HMRC’s recently published (March 2021) Cryptoasset manuals in which HMRC maps out its view of the appropriate tax treatment of cryptoassets, echoing the advice I have already been giving to clients.
I would like to look back at the tax treatment of cryptoassets since I have been advising on it, and consider what has changed in that time and what remains the same? I will also provide some advice on to ensure that you are tax compliant with regard to your cryptoassets. Whilst many articles focus primarily on Bitcoin, these comments are relevant to all those other currencies, new and old.
What remains the same?
- Cryptoassets are still a highly volatile, high risk investment.
- Regulation of cryptoassets remains a grey area and the market place is a target for fraud and scams.
- Cryptoassets gains are usually subject to Capital Gains Tax or Corporation Tax in the UK but can be subject to Income Tax.
The tax treatment of transactions.
It is important to understand that there are complex matching rules for purchases and sales, and gains and losses of cryptocurrencies. A poorly structured series of purchases and sales can mean you pay more in tax than you have gained in overall value so it is worth giving this due consideration before concluding any transactions.
In nearly all circumstances, gains are subject to Capital Gains Tax in the UK, regardless of where the asset is held. Gains on disposal within a company structure are subject to Corporation Tax.
This should be regarded as positive as currently the maximum rate of Capital Gains Tax is 20% and there is also an Annual Exemption which covers the first £12,300 of gains per individual each year
There are many urban myths surrounding tax such as;
- Tax is only payable if Cryptocurrency is converted into FIAT (conventional currency) – NOT TRUE
- Crypto transactions are usually gambling so there is no tax to pay – NOT TRUE
- HMRC cannot find out about anyone’s holding so there is no need to declare transactions – NOT TRUE
Like most myths, the three bullet points above have no grounding and are all incorrect. To reiterate, personal gains are subject to Capital Gains Tax in the UK (or in certain circumstances Income Tax) and gains on disposal within a corporate structure are subject to Corporation Tax.
What has changed?
Since 2017, cryptocurrencies have become more prevalent, with everyone from the likes of TikTok “celebrities” to Warren Buffett and Elon Musk voicing their opinions on the subject. The value and volume traded of many coins has increased significantly, especially in recent months, to levels far greater than in 2017.
The variety and nature of transactions and uses of cryptocurrency has also increased and now includes investing, mining, staking, airdrops, ICO’s (initial coin offerings), paying for goods & services and gambling amongst many others.
HMRC’s first Crypto guidance was issued in 2014, followed very slowly by only one more notice in December 2018 and they only recently (March 2021) published their Cryptoasset manuals. This publication is a welcome addition to a taxpayer’s tools. For experienced tax advisers however, who have been advising on cryptoassets for some time now, the manuals do little more than confirm our knowledge to be correct. HMRC have made it clear that taxes are payable on gains made through crypto transactions and they will take steps to investigate as appropriate.
Many of the crypto exchanges are now open and transparent with easy access to historic transactions and this provides HMRC with greater access to information. A landmark example of this was Coinbase’s deal with HMRC in the UK in which Coinbase agreed to share data with HMRC relating to customers who received more than £5,000 equivalent of cryptocurrency. This and similar access with other crypto exchanges allows HMRC far greater reach in terms of investigating tax errors or fraud.
There have also been advancements in the development of free and subscription software that assists in calculating taxable gains. Although their results need careful scrutiny by trained professionals as their accuracy is not guaranteed, their use may aid compliance with HMRC’s requirements for record keeping.
In addition, in January 2020, new regulatory powers were introduced to allow the FCA (Financial Conduct Authority) to supervise how cryptoasset businesses manage the risk of money laundering and counter-terrorist financing. Now, UK cryptoasset businesses must comply with the Money Laundering Regulations (MLRs) and register with the FCA directly.
If a firm you are using to buy or sell cryptocurrency did not submit an application to the FCA by 15 December 2020, it will not be eligible for the Temporary Registration Regime. It should therefore have returned any cryptoassets to you and stopped trading by 10 January 2021. If they are not listed on the Financial Services Register, they are not allowed to carry on business as they are now operating illegally and you should not use them. You can check whether a firm is registered by visiting the FCA website (https://register.fca.org.uk/s/search?predefined=CA )
So, what should you do?
If you have made gains from investing, that’s great, enjoy the knowledge of having made the right decisions but don’t put whatever you have built at risk.
It is important to always ensure you have correctly reported your tax position and paid your tax when you should. Capital Gains Taxes should be reported and paid through your Self Assessment tax return. Gains through a corporate structure are reported through your Company Tax Return.
In January 2020 we noted that HMRC had announced that when investigating misreporting they would not look back further than 3 years before July 2019 ie not before 2016. This means that now HMRC are looking at 5 years and the potential tax at risk has increased proportionately. This gives HMRC even greater interest in looking for crypto users to investigate.
We suggest that you speak to a suitably experienced tax adviser to find out whether you have anything to declare and if so how they can assist in any disclosures. Be it if you only have recent gains or if they go back a number of years an experienced tax adviser will be invaluable in guiding you through the process.
If there are omissions, do not bury your head in the sand. HMRC look more favourably on those who come forward admitting genuine errors as compared with those who they discover.
Ongoing, it is essential that you maintain detailed records of all crypto transactions and engage a crypto tax specialist to deal with your tax submissions. Due to the number of transactions that can technically arise, even when a few coins are bought or sold, this is a highly complex and specialist area in which points can easily be overlooked or misunderstood.
RPG incorporating Crawfords chartered accountants have the experience and skills to advise on the taxation of crypto transactions. Over the years we have supported and guided clients who have made modest gains over only a few transactions and those who have generated significantly higher sums spread over a number of years and over a multitude of transactions in mixed currencies. This includes those who look at Crypto investment as a sole investment or part of a portfolio alongside their complex businesses and other savings.
We are here to help and advise you. Our office is in Manchester however the clients we advise on the taxation of crypto transactions are based across the UK.
For contact us for further advice regarding your own situation email info@rpg.co.uk
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