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 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.
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.
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Helen Thornley has a focus on personal and capital taxes. Initially training as an accountant before moving to tax, she worked in practice until her appointment as a technical officer in 2017. She also has an interest in the history of tax.