Ten years ago Bitcoin emerged as the first digital currency, and those who made the lucrative choice to invest in this new digital asset are the envy of many today. Over the last ten years the value of one bitcoin has increased from just a few pence to over £6,500 in 2020.
Over the last decade the value of crypto-assets has become unavoidably apparent. Their use is more mainstream than ever, with Facebook announcing the coming launch of their own blockchain currency Libra in June 2019.
It should, of course, be noted that there are many different types of digital coin, and factors such as mining, airdrops, ICOs and gambling, occur in ways that traditional currencies do not. Thus, society’s behaviour towards digital currencies is becoming more complex.
At Crawfords we have built up experience in these complex transactions, and stay abreast of trends within the crypto currency world. In our blog we’ve covered many updates in the handling of digital assets, including the announcement of Libra, and the previous lack of regulation. We ensure our clients and readers are informed and prepared, and in this blog we will tell you what you need to know about Crypto currency taxation.
Requesting users information and transactional data from Crypto Exchanges
In 2014 HMRC released its first guidance note on the handling of cryptocurrency transactions, but as the digital currency rose to precedence, and considering its volatility in price, questions have been raised as to its taxation.
In December 2019, a long awaited guidance update on crypto-asset tax for individuals was released, and the Inland Revenue began to pay closer attention to the behaviour of crypto-asset holders.
Fintech media outlet Coindesk reported in August 2019 that HMRC had contacted a number of UK-based crypto exchanges, namely Coinbase, eToro and CEX.IO, requesting lists of their users and transactional data, claiming that:
“These exchanges can retain information on their clients and the transactions that they have completed. These transactions may result in potential tax charges and HMRC has the power to issue notices requiring exchanges to provide this information.”
When probed with a freedom of information request HMRC commented that withholding details about its intentions collecting this information will avoid jeopardising the assessment or collection of tax.
Backdating calculation of tax for cryptocurrency is by no means a straightforward task, even with specialists in the Inland Revenue or accountants. As such, cryptocurrency exchanges are obliged to cooperate with HMRC in order to identify such individuals who may need announce their holdings, as even if losses have been made there is still an obligation to disclose this.
Those in the crypto currency loop may have heard that HMRC plans to backdate it’s claims for information for no more than the past three years (from approximately July 2019). However this is in fact the period in which the highest revenue in digital currencies was made. As a matter of practicality this it is the logical period for HMRC to concentrate on.
We can expect for Inland Revenue to conduct a thorough and ongoing investigation into all instances of tax owed. It can be said almost for certain that if a person failed to disclose holdings three years ago there must have been purchase made before that time. HMRC will look at transactions arising earlier than the aforementioned three year period being circulated.
What does this forbode to crypto-asset holders?
This move by HMRC looks familiar, and the next steps are predictable. In July 2019 the U.S. Internal Revenue Service (IRS) announced that they had sent letters to taxpayers who own crypto-assets advising them they may need to pay back taxes owed on their holdings. The IRS claimed that the names of the taxpayers were sourced through ongoing compliance efforts.
Holders of crypto-assets (both past and current) in the UK should expect to receive similar notification in the not-too-distant future. HMRC commonly acquires the details of asset holders and sends out letters asking if the information they have is correct, with a warning that there may be outstanding payments.
However, this is not always the case, and to avoid facing an assessment from HMRC we at Crawfords strongly recommend being prepared with tax calculations to minimise the risk of penalties.
How to prepare for cryptocurrency taxation
HMRC is very likely to uncover almost all crypto holdings. As with all such investigations, we advise people to be proactive. It is always better to approach them before they approach you.
An HMRC spokesperson has urged cryptocurrency investors to not be put off by the recent interest, saying:
“We want to help people get their tax affairs right and believe that taxpayers want to get it right. HMRC regularly gathers data from a range of information sources using powers provided by parliament.
“Data collected by HMRC is used to improve the integrity of the tax system and to identify those that have failed to declare their gains.”
Tax calculations on cryptocurrency are complicated, required to account for numerous transactions, far more so than in fiat exchanges.
Furthermore, it can be said that the longer you leave balancing digital currency affairs, the more complicated it becomes, therefore more time is spent on the accounts. Ultimately this incurs a higher cost to you.
Challenges such as calculating tax for profits or gains, as well as mining for cryptocurrency require an in-depth understanding by a specialist accountant. As a rule of thumb, it can be said that if gains are less than approximately £12,000, and proceeds less than approximately £48,000, holders of crypto-assets are less likely to have made errors.
Those with gains in excess of, or proceeds of more than, the above are advised to contact Crawfords at their earliest opportunity. Proceeds are not simply taxable if converted back to fiat, but also if used to purchase anything or exchanged for another cryptocurrencies.