Following HMRC’s drive to aid the economic impact of the COVID 19 pandemic and a surge in recent enquiries into tax affairs of individuals and companies alike, HMRC have confirmed that e-money value transfer systems and Crypto assets are on their watchlist of assets they will be looking closely into. This is particularly the case, since it is known such assets are commonly used by organised crime. HMRC now receives information from crypto exchanges on transactions carried out by crypto asset investors based in the UK and may also receive information on crypto asset transactions under the Common Reporting Standard.
HMRC will be using this information to help check whether taxable transactions have been correctly reported and subjected to tax, including capital gains tax on gains, and income or corporation tax on profits, mining fees and other earnings.
It is interesting that HMRC now also specifically ask for confirmation of Crypto assets held when individuals are asked to complete a “Statement of all Assets”. Such a form is typically requested in the event of an HMRC enquiry into an individual’s tax affairs, and it seems HMRC are keen to make it clear to taxpayers that such assets are within the UK tax regime and must be declared or face potential prosecution. Ignorance is definitely no longer an excuse.
What is a Cyrpto asset or crypto currency?
There are many different types of crypto assets. 'Cryptocurrencies ' such as Bitcoin (BTC) are just one variation.
A cryptocurrency is a type of crypto asset which shares many similarities with other currencies.
- You have fluctuating exchange rates that are driven by the market.
- You can buy and sell it in exchange for other cryptocurrencies or for fiat currencies e.g., pounds, euros or dollars.
- Most cryptocurrencies use blockchain technology and some are built around different platforms.
HMRC's view is that:
- Whether mining activities amount to trading depends on the degree of activity, organisation, risk, and commerciality. For example, mining using an already owned home computer is unlikely to be trading.
- If the miner keeps the awarded assets, they may have to pay CGT or CT on chargeable gains on future disposals.
Where mining is a trading activity the exchange tokens form part of trading stock and normal trading rules about transfers to and from stock apply.
Crypto assets exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is on the individual to keep their own records for each crypto asset held in the event of a HMRC enquiry.
Types of Records
- Paper (cold) wallets containing the individuals public and private keys
- Electronic (hot) wallets on devices
- Other records of their transactions and balances such as downloads of their wallet activity from a crypto asset exchange
- Hardware (cold) wallets looking like a USB, containing the individuals public and private keys
- The type of Crypto asset
- Date of the transaction i.e. purchase or disposal
- Number of units involved
- Value of the transaction in pound sterling
- Cumulative total of investment units held per each crypto asset
- Bank statements and wallet addresses
Tax Exposure in dealing with Crypto Assets
Whether profits are taxed as income or capital gains depends on whether the individual is trading or investing. In most cases, individuals hold crypto assets as a personal investment, usually for capital appreciation, or to make purchases and therefore individuals will be liable to pay Capital Gains Tax when they dispose of their crypto assets. Capital Gains Tax is charged at 10% or 20% depending on whether the individual is a basic or higher rate taxpayer.
However, in the event individuals acquire crypto assets from their employer as a form of non-cash payment or the individual is mining their crypto assets then Income tax and Class 1 National Insurance will be payable.
If it appears that tax has not been accounted for on crypto asset transactions, a voluntary disclosure to HMRC is generally the best course of action in order to obtain the best possible settlement terms, including minimising penalties and interest. Those who are found to have concealed assets from HMRC can expect to be prosecuted.
If you would like to discuss any potential tax implications of trading or investing in crypto currency please contact Carol Edwards or your usual AAB contact.