Cryptoasset disclosures
Cryptoassets have grown in popularity in recent years and it has become increasingly common for individuals and companies to own or trade in them. According to research conducted by the Financial Conduct Authority, in January 2021 it was estimated that 2.3 million UK adults held cryptoassets.
There are thousands of different types of cryptoassets available and so the terminology and variety of possible transactions develops rapidly with time. There is also a wide spectrum of investor types, from those who invest small sums as a gamble or bit of fun to those who invest large sums and frequently swap currencies in the belief the investments pose very real profit-making potential.
Those who hold cryptoassets will need to pay close attention to HMRC’s view of the UK tax treatment of these assets, which continues to develop.
HMRC’s view of the taxation of cryptoassets
Historically, HMRC has stayed relatively quiet about how cryptoassets should be treated for tax purposes other than brief policy papers published at the end of 2018 and 2019.
The publication of the Cryptoassets Manual on 30 March 2021 has brought some much-needed clarification on HMRC’s view of how Cryptoassets should be treated for UK tax purposes. We have broadly stated the headline features below.
- Capital Gains Tax (CGT) is likely to be due on disposals/exchanges of cryptoassets by individuals if they are held as personal investments. According to HMRC, the existing share matching rules should be applied.
- Income Tax is likely to be due if the taxpayer is trading in cryptoassets. Whether a person is investing or trading is based on the facts of each case; there is great potential for disagreement here given there may be vastly different tax outcomes.
- Inheritance Tax (IHT) liabilities will need to be considered in the event cryptoassets are gifted (both in lifetime or upon death).
- A variety of taxes can apply to businesses that use or invest in cryptoassets.
It is important to understand that HMRC’s manuals are internal guidance for its staff, outlining HMRC’s interpretation of the law at the time. The HMRC manuals undergo periodic changes when legislation is introduced or as case law develops meaning that HMRC must change its stance.
As it is an emerging market still in its infancy, there is not currently any cryptoasset specific legislation or case law upon which HMRC has formed its views. Some professional commentators have already raised doubts about HMRC’s views, for example, debating where cryptoassets should be deemed to be physically located for tax purposes. These doubts mean that in the next few years we can expect more disputes between taxpayers and HMRC.
Obligations of cryptoasset owners
The UK tax system is based on taxpayers self-assessing the amount of tax they owe with HMRC then having the opportunity to ask questions to verify the accuracy of a return. This means cryptoasset owners will need to take reasonable care and keep adequate records to enable reporting of the right income or gains and computation of the correct amount of tax.
Problems can arise, for example, in instances where cryptoasset exchanges only keep transaction lists for a short period of time or if an exchange ceases to exist. Nonetheless, the onus is on the taxpayer to maintain adequate records for all transactions. This could include the following:
- a record of all cryptoassets owned
- dates of purchase, sale and swap transactions and the number of units per transaction
- the value of each transaction in pounds sterling at each relevant date
- public and private keys held in physical or digital wallets
- transactional histories, for example, by downloading all wallet activity from the exchange on a frequent basis to ensure all activity is recorded
- personal bank statements which show the amounts invested in/withdrawn from cryptoasset exchanges in traditional currencies.
HMRC can enquire into submitted tax returns within a defined enquiry window. If a return is found to be inaccurate as a result of inadequate records or understated activity, HMRC can assess penalties for the inaccuracies. These penalties will depend primarily on the behaviour that led to the inaccuracy but could also be significantly increased depending on the deemed location of any asset or funds involved in the transactions.
What data can HMRC access?
HMRC has an armoury of statutory information powers, which enables it to request information from taxpayers and third parties.
HMRC’s newest information power (see Financial Institution Notices) enables authorised officers to write to Financial Institutions to request information about taxpayers for the purpose of checking their tax position or for collecting a tax debt without the taxpayer’s prior approval. This new power was only introduced in June 2021 so it remains to be seen how it will be used. However, it will be no surprise if HMRC uses this and its other extensive powers to gather data from exchange platforms in order to tackle the suspected hidden economy relating to cryptoassets.
According to various sources, HMRC has already applied pressure on exchanges to hand over information about their customers. In Autumn 2020, a popular exchange reportedly advised its users that it would be providing details to HMRC about customers who have received more than £5,000 within a certain time frame.
What should I do if I haven’t declared my cryptoasset profits for years?
It is always better to be proactive and make a voluntary disclosure to HMRC, rather than to procrastinate and wait for HMRC to ask questions.
When you make a voluntary disclosure, you are in the driving seat and have the ability to frame the disclosure in the most suitable way. You have the opportunity to outline the reasons for any understatements, the conclusion reached in respect of the number of years assessable and a proposal in respect of the amount of tax, interest and penalty that is due. It also means you can provide an explanation to HMRC regarding any reasonable assumptions made or estimates used in cases where insufficient records exist. The penalties for voluntary (or unprompted) disclosures are always lower than those for prompted disclosures.
This is in stark contrast to the position taxpayers tend to find themselves in when HMRC triggers an investigation. In these instances, you will probably be on the backfoot, being bombarded by numerous questions from HMRC (which may arguably not be relevant to establishing the tax position) and HMRC tends to be less amenable and forgiving if inadequate records have been maintained. As mentioned above, the penalty ranges for prompted disclosures are always higher than for those made voluntarily.
The net is closing in - individuals and businesses with cryptoassets who have not yet considered their exposure to UK tax will need to do so quickly and seek appropriate advice as soon as possible.
How we can help
Our award-winning Tax Resolutions team is experienced in advising clients on how to bring their tax affairs up to date, while ensuring HMRC applies its powers fairly. We have worked with clients and their agents to bring historic and complex tax issues up to date.
If you choose to work with us, you can expect us to:
- review the background of your case and identify all issues that need to be disclosed.
- advise on the most appropriate steps to ensure a full disclosure is made to HMRC to reduce the possibility of them asking follow up questions
- calculate the underpaid tax while ensuring all legitimate claims for tax relief and allowances are considered
- act as a buffer between you and HMRC so that you do not need to speak directly with them
- advise you if HMRC is overstepping the mark, for example, by making requests for data that it is not entitled to
- advise you on the likely penalty position and consider all mitigating factors to reduce penalties so they are as low as possible
- liaise with third parties to obtain the data that is relevant to your disclosure
- assist you with your ongoing tax returns if you wish to appoint us as your tax compliance agent.
Our team is accessible and approachable, and ready to answer your questions, giving you the confidence you need when dealing with sensitive issues.
