ATT Technical Officer The Association of Taxation Technicians
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Clients caught in a cryptoasset conundrum

30th Aug 2019
Coins of various cryptocurrencies
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Helen Thornley explains how an adviser should react when faced with an individual taxpayer with income or gains on cryptoassets they have not declared.

The thorny issue of cryptoassets and tax compliance is back on the agenda after a number of cryptocurrency exchanges were reported to have received requests from HMRC for lists of their customers and details of transactions.

Income or gains?

The first task is to establish whether there are unreported income or gains. Prior to December 2018, there was limited guidance on the tax treatment of cryptoassets within Revenue & Customs Brief 9 (2014) published on 3 March 2014. This explained that the position for individuals was fact-dependant but made it clear that either income tax or CGT could apply to transactions.

It was not until December 2018 that more detailed guidance was published, comprising a policy paper and a collection of guidance notes, which I covered last year. This guidance was developed with input from tax agents and professional bodies and is, according to HMRC, the most comprehensive guidance on the taxation of cryptoassets in the world.

No new law

While the 2018 guidance sets out what HMRC envisages the taxation position to be for individuals, it is important to appreciate that there is no new law: HMRC guidance is still guidance, not tax law.

The guidance that exists has been developed by applying existing principles and case law to an entirely new, virtual asset class. This has not been a straightforward exercise and, while the new guidance is helpful, it does not address some key points such as situs: where these virtual assets are considered to be located for taxation purposes.

Where the guidance does not cover a given point, tax advisers and their clients will have to go back to first principles and use their judgment to reach their own conclusions as to how these assets fit within the existing law (with the majority of investors expected to fall into the CGT regime).

No more gambling

What the 2018 guidance does do is clarify HMRC’s position on gambling. In their 2014 guidance, HMRC said: “depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable”. That 2014 guidance then went on to refer to gambling wins as not being taxable. This was taken by many to mean that trading in cryptoassets could be considered gambling, particularly where newer and more exotic cryptoassets were purchased, and thus fall outside the scope of tax.

The 2018 guidance now specifically states “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”. While this has been seen in some quarters as a change in policy, it isn’t seen that way by HMRC.

In a recent webinar, the HMRC speaker said that HMRC had never declared cryptoasset trading to be gambling and had always taken the view that the position was fact-specific. In fact, the 2018 guidance implies that the majority of cryptoasset investors are expected to fall into the CGT regime.

In practice, the previous HMRC statements, together with online commentary by third parties, may well have influenced the decision of some people not to disclose their cryptoasset transactions. This is unlikely to be a sustainable position, particularly if they are trading in established cryptoassets such as Bitcoin.

Disclosure timescales and penalties

Where it is established that there is untaxed income or gains to report, the next question is how far back the individual should go if they are making a disclosure. Or equally, how far back will HMRC choose to look in the event of a tax enquiry?

Although these assets are virtual, the starting point is always to consider the legislation that we know to be real. For income tax and capital gains tax the typical disclosure periods are:

  • The previous four years as a default.
  • Up to six years where revenue has been lost as a result of careless behaviour.
  • Up to 20 years where revenue has been lost as a result of deliberate behaviour.

An extended period of assessment and additional penalties are also possible if the individual has failed to notify HMRC of chargeability to income tax or CGT. There is also the potential for interest and penalties in addition to the tax owed.

Of course, to make a disclosure, the individual must have records of their transactions. Taxpayers need to be aware that cryptoasset exchanges do not keep transaction histories indefinitely and it is even possible that by the time reporting is contemplated that the exchange is no longer in existence.

Failure to keep records could put the taxpayer at a disadvantage when trying to determine the quantum of any non-disclosure.

Agents’ obligations

Agents faced with making a correction for a client should bear in mind their obligations under Professional Conduct in Relation to Taxation (PCRT) and may find the guidance on Dealing with errors in Helpsheet C useful.

Reasonable excuse

Given that the tax position has not been (and is still not completely) clear for cryptoassets and that guidance was only published relatively recently and is not comprehensive, an individual may consider that they have a reasonable excuse (or at least that their behaviour was not deliberate) if previously filed tax returns were not complete or accurate in respect of their cryptoasset transactions.

While this would not absolve them of the tax subsequently assessed as due, if HMRC accepts that the taxpayer had a reasonable excuse (or was at worst careless), that could help to eliminate (or reduce) any penalties.

However, given that HMRC has said since March 2014 (and continues to reiterate) that all cases are fact-specific, it is probably prudent to assume that the absence of guidance will not by itself be accepted as a reasonable excuse for failure to disclose in all cases.

Other factors such as the sophistication of the taxpayer, the efforts that they made to establish the tax position at the time, what (if any) disclosures were made on previous returns and the scale and nature of their activities are all likely to have a bearing.

As HMRC looks more closely at this area, individuals who have not disclosed their cryptoasset transactions should review their position. It is far better to make a voluntary disclosure than to wait for HMRC to find you. Even in a virtual world, you can’t hide from HMRC forever.

Replies (5)

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By petestar1969
02nd Sep 2019 11:01

I'm confused. How can a gain, which you can't really spend, because you can't easily convert it to real money, be taxable?

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Replying to petestar1969:
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By BarryJames
02nd Sep 2019 11:24

Not sure I understand your query. If a gain is unrealised, it isn't taxable. If the cryto-currency has been disposed of, and a gain realised, it is taxable. If it has been disposed of it has been converted to "real" money, unless re-invested in other cryto-currency which would be the individual's choice.

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By vstrad
02nd Sep 2019 11:30

Thank you for a detailed and helpful article, Helen. Could I just point out that it's dependent, not dependant?

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Replying to vstrad:
Hele Thornley
By Helen Thornley
02nd Sep 2019 14:58

Oops!
Thank you

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By Ian McTernan CTA
02nd Sep 2019 11:40

Very few have gains to report- usually those that bought Bitcoin years ago before the hype drove the price way above where it should be.

Most have losses- so make sure to ask clients about them to enable them to utilise those losses against other gains.

The bigger issue is with clients who invest small amounts in many many 'currencies' and then trade between them without ever converting to cash- sometimes this results in hundreds or even thousands of trades. I usually solve this issue by using 'mark to market' year on year which reflects the overall position taking into account any actual cash invested and withdrawn. Provided you are consistent HMRC seem to accept this as a valid method- the alternative is if they open an enquiry send them all the transaction reports and ask them to calculate the exact gains for all years:-)

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