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.
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
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.
Inheritance Tax
Other taxes
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.
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.
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.
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.
Although every client is different, in every instance we will:
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.