Cryptoasset disclosures
Acting on your behalf to ensure all the appropriate steps are taken to mitigate penalties.
The taxation of cryptoassets is complex, and HMRC is taking great interest in this area.
Cryptoassets have grown in popularity from what was originally a niche technology into a major alternative investment, with a wide spectrum of investor types. According to research by the Financial Conduct Authority, the number of adults holding cryptoassets more than doubled from 2.3 million in January 2021 to 4.97 million in August 2022.
Users of cryptoassets will need to ensure that their UK tax and reporting obligations are up-to-date.
We can provide specialist advice and guide you through any disclosure you may need to make.
How are cryptoassets taxed?
HMRC published their Cryptoassets Manual on 30 March 2021 after several years of consultation. The manuals represent HMRC’s interpretation of current legislation and case law for internal staff use, however there is not currently any UK legislation regarding cryptoassets as it is an emerging and complex technology. Professional commentators have already challenged HMRC’s approach, so these uncertainties will inevitably lead to disputes between taxpayers and HMRC.
Capital Gains Tax
If you swap or sell cryptoassets as personal investments, Capital Gains Tax may be owed. Capital gains/losses would be calculated in a similar way to investing in shares.
Income Tax
Income tax could be owed on trading profits from cryptoassets. Trading status is fact dependent and there is great potential for disagreement given the different tax treatments.
If you swap or sell cryptoassets as personal investments, Capital Gains Tax may be owed. Capital gains/losses would be calculated in a similar way to investing in shares.
Income tax could be owed on trading profits from cryptoassets. Trading status is fact dependent and there is great potential for disagreement given the different tax treatments.
Inheritance Tax
When cryptoassets are gifted during a person's lifetime or after their death, Inheritance Tax will need to be considered.
Other taxes
A variety of taxes including Corporation Tax and Stamp Taxes can apply to businesses that use or invest in cryptoassets.
When cryptoassets are gifted during a person's lifetime or after their death, Inheritance Tax will need to be considered.
A variety of taxes including Corporation Tax and Stamp Taxes can apply to businesses that use or invest in cryptoassets.
As an emerging and complex class of assets, there is not currently any UK legislation regarding cryptoassets upon which HMRC has formed its views, and professional commentators have already challenged some elements of HMRC’s approach.
These uncertainties will undoubtedly lead to disputes between taxpayers and HMRC in the future.
What data can HMRC access?
HMRC has many statutory information powers to request information from taxpayers and third parties such as traditional financial institutions.
In addition, HMRC has also started approaching crypto exchanges. In Autumn 2020, a popular exchange reportedly advised its users that it would be providing details to HMRC about customers who had received cash payments over £5,000 during the tax year.
In November 2023, the international Crypto-Asset Reporting Framework was agreed between almost 50 countries including the UK. Cryptoasset platforms will soon be obliged to share customer information with tax authorities, which will then be exchanged between participating countries to crack down on tax non-compliance.
All of this will give HMRC a wealth of data regarding cryptoassets, and it will only be a matter of time before they start to approach taxpayers.
Taxpayers need to take reasonable care to ensure that cryptoassets are accurately reported and taxed.
The UK tax system is based on taxpayers self-assessing the amount of tax owed, after which HMRC may ask questions within a strict enquiry window.
It is likely that HMRC will be taking a keen interest in taxpayers who have reported cryptoasset income or gains on their returns.
Taxpayers are obliged to maintain adequate records, which HMRC may request to see in order to verify the accuracy of the return.
Adequate records may include cryptoasset holdings and exchanges used, transaction ledgers, valuations, public and private keys, and bank statements showing deposits/withdrawals in traditional currency.
If a return is found to be inaccurate, HMRC can assess penalties and interest will be charged on the overdue tax liabilities.
In November 2023, HMRC has introduced a new disclosure facility specifically for cryptoasset-related tax liabilities
Taxpayers who were unaware of the tax implications of cryptoassets and did not report their income or gains may now need to come forward. If you are unsure whether you may have tax to pay on your cryptoassets, it is crucial to seek specialist advice and make a voluntary disclosure, rather than wait and see if HMRC make an approach.
The number of years involved in a disclosure, and the penalty rate on underpaid tax, depends on the taxpayer’s behaviour that caused the irregularities.
Making a voluntary disclosure gives you the best opportunity to explain the reasons for your behaviour and any areas of uncertainty or missing information, and make the first proposal of the tax, interest and penalties due.
This is in stark contrast to the position you may find yourself in if HMRC makes the first approach. HMRC are likely to ask numerous questions, some of which may not be relevant to your tax position, and take a stricter view of the behaviour or circumstances that led to any understatements.
The penalty rate is always lower for taxpayers who come forward on a voluntary (or unprompted) basis, compared to prompted disclosures.
Individuals and businesses with cryptoassets who have not yet considered their tax exposure will need to do so and seek specialist advice as soon as possible.
Our award-winning Tax Resolutions team can help you navigate the rules on cryptoassets and advise on what needs to be disclosed to HMRC
How we can help
Although every client is different, in every instance we will:
- review the background with you to ensure all issues are being resolved
- advise on the most appropriate route of disclosure, whether that is the cryptoasset disclosure facility or an alternative route
- produce a bespoke disclosure report to reduce the possibility of follow up questions
- liaise with exchanges and other third parties to assist with obtaining the relevant data
- calculate the tax due while considering all legitimate claims for tax relief and allowances
- act as a barrier between you and HMRC so that you won’t need to speak to them directly
- advise and safeguard you if HMRC is overstepping the mark
- advise you on the likely penalty position and consider all mitigating factors to minimise the penalties.
Our team can perform thorough investigations on subjects and entities to analyse the flow of funds to identify and recover assets.
We can also work alongside our dedicated Forensic Services team to support you through investigations involving cryptoassets, to minimise the financial and tax consequences of fraud on you or your organisation.
Traditional methods of asset tracing struggle to keep pace with the movement of cryptoassets across wallets and ledgers. New technologies and privacy-focused cryptoassets can also be used to obscure transaction records, particularly in the event of an investigation regarding fraudulent funds or proceeds of crime.
Our experts can deploy sophisticated tools and techniques, such as blockchain analytics, machine learning or tracking behavioural patterns, to trace cryptoassets and unveil patterns of financial activity, all of which will have tax consequences.
We're here to help
Our experienced and award-winning Tax Resolutions team can help you to resolve any tax issues relating to cryptoassets to give you peace of mind going forward.
Partner, Tax Resolutions
Partner, Head of Tax Resolutions