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Cryptocurrency investors are often unaware of their tax position and are likely to have accrued tax liabilities over several years which have gone unreported. HMRC have an arsenal of tools available to them and are actively seeking to obtain information from exchanges, wallet and other crypto-platforms to identify taxpayers who have failed to report and pay their liabilities.
As cryptocurrency continues to grow in popularity, HMRC will be less likely to accept that taxpayers are simply unaware of their obligations and have acted carelessly in failing to report their liabilities, or in some circumstances, deliberately failing to report their liabilities.
What do we know about HMRCs Approach?
HMRC are actively seeking to obtain information from exchanges to identify taxpayers who may have failed to report any tax liabilities. HMRC have published manuals with a section dedicated to compliance, containing headings including:
All but two of these headings have been withheld under Freedom of Information provisions but it is clear that HMRC considers Cryptoassets to be an area which involves high-risk of non-compliance and criminal activity.
HMRC have a number of statutory tools available to them to request information from exchanges and wallet providers, in the UK and overseas. Whilst the scope of these provisions may be subject to challenge, this is a developing area and is not something we detail in this article.
Additionally, crypto exchange and wallet providers are being brought within the Anti-Money Laundering regulations, enforcing due diligence requirements, requiring customers to disclose their identities and reporting suspicious activity, meaning that relevant information will be more accessible subject to a valid information request by HMRC.
In summary, it would not be unreasonable to assume that HMRC will have access to your crypto-data eventually. We would strongly advise individuals to review their position and making a voluntary disclosure to HMRC where there is an unreported liability.
Do I have a liability or reporting obligation?
Ultimately, individuals who are involved in cryptoassets should review their positions immediately. Typically, persons involved in the following activity are likely to have a reporting requirement and / or tax liability:
For investors who have simply purchased crypto using FIAT currency, and have not undertaken any transactions, the likelihood is that there would be no event for tax purposes. However, we would still recommend taking advice where you are planning to sell or exit your holdings, as this would be taxable and there may be planning opportunities to reduce the tax liability.
However, if you fall within any description set out above, we would strongly recommend that you review your historic and current position.
How do I make a disclosure?
HMRC have an online disclosure facility designed to enable taxpayers to make voluntary disclosures. However, the disclosure process can be long and arduous. Firstly, a taxpayer should notify HMRC that they intend to make a disclosure, giving taxpayers 90-days to follow up with an actual disclosure.
Unfortunately, HMRCs disclosure forms provide little opportunity for narrative or explanation and where there are several thousand transactions or specific issues which need to be explained. As such, using the online disclosure facility can often result in enquiries being made by HMRC before the disclosure is accepted. This process can take several months, and often in excess of 12-months.
The taxpayer will also be required to volunteer penalties and interest. Penalties can be calculated in line with the relevant regimes and will typically be in the region of 15% – 30%, but can be reduced to nil or be as high as 100% depending on the circumstances. The interest is a question of fact based on the prevailing rates at any point in time. However, one must ensure they are being reasonable in their approach, or risk HMRC rejecting the disclosure and opting to undertake a formal inquiry, which can be significantly more stressful, and place you at risk of greater penalties.
ETC Tax have substantial experience in preparing disclosures and dealing with the issues faced by cryptocurrency investors. We understand HMRCs approach and have a track record for preparing robust disclosures and having those disclosures accepted without queries. In particular:
i) Demonstrating that we have applied the correct rules and pre-empting any queries that HMRC may have to ensure prompt acceptance of the disclosure without unnecessary queries or delay
ii) Addressing common issues faced by taxpayers including inadequate or missing records and applying a reasonable or rational approach when calculating your tax liability which is often accepted by HMRC
iii) We understand the technical aspects of cryptoassets and are able to address the more complex and unique areas of cryptoassets such as liquidity pooling, crypto-gaming and NFTs, conditional and / or restrictive covenants on the sale of limited participator node-operation and securitised crypto-loans
iv) Ensuring a robust approach is taken with respect to the penalties position, which can often involve considering the information that HMRC has, or may reasonable have available to it. We have had success in arguing the lowest available penalties rate in any given circumstance
With the above in mind, we are able to make robust disclosures on behalf of clients with the view to a smooth and prompt process and ensuring the best outcomes for our clients.
To date, ETC have assisted in unique and sensitive cases including large historic and offshore non-compliance affecting crypto investors, Crypto-gaming and NFT tokens, unique mining arrangements where there are restrictions and conditions imposed on node operators and working with DeFi platforms.
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