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Cryptoasset holders urged to use disclosure scheme

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HMRC has launched a specific disclosure route for those with unreported taxes on cryptoassets to bring their affairs up to date.

22nd Dec 2023
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In November, HMRC launched a new voluntary disclosure route to allow individuals with undeclared capital gains tax (CGT) or income tax relating to cryptoassets to come forward and correct their affairs. This latest campaign follows a series of targeted letters over recent years to individuals that HMRC believes hold cryptoassets but who have not declared any income or gains from them. 

The latest research by the Financial Conduct Authority estimates that, as at August 2022, around 4.97m UK adults held cryptoassets – roughly 9% of the population. That figure is a significant increase on their previous estimate from 2021 of 2.3m investors. (That research preceded the collapse of FTX, a leading cryptocurrency exchange, in November 2022, followed by the so-called “crypto-winter” of 2022/23. It will be interesting to see if this has any effect on the numbers when the study is repeated next year.) 

What to declare 

HMRC is expecting that most individuals holding cryptoassets will be within the scope of CGT, with their manual saying “in the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases”. While it is possible to be “trading” in cryptoassets, HMRC considers there is a high bar to clear with individuals buying, selling and exchanging tokens with sufficient frequency only in “exceptional circumstances”. 

Previous letters to individuals have highlighted HMRC’s concerns that individuals are unaware that the following activities could create a disposal for CGT purposes: 

  • selling cryptoassets in exchange for regular, “fiat” currency such as UK sterling or dollars
  • exchanging cryptoassets for other cryptoassets
  • gifting cryptoassets to anyone other than a spouse or civil partner
  • using cryptoassets to buy goods or services.

In addition, in recent years, so-called DeFi or decentralised finance activities have also become popular, with cryptoasset investors seeking to make their virtual assets work harder by lending or “staking” them in return for “interest-like” rewards. HMRC provided additional guidance on DeFi last year, setting out how it considers these lending and borrowing transactions should be taxed. While much of this is the subject of consultation, until changes are formally confirmed this guidance sets out HMRC’s expectations for treatment in previous returns. 

Fortunately, the same Financial Conduct Authority (FCA) research highlighted above suggests that the mean value for UK investors with cryptoassets is in the region of £1,595. It therefore seems likely that for a lot of investors – at least historically – the annual exemption should eliminate a lot of tax issues. But this allowance was halved for 2023/24 to £6,000 and is due to halve again for 2024/25, so even those with modest portfolios may need to consider their tax position more carefully in the future. 

How far back?

Despite the unusual nature of cryptoassets, the usual rules apply when it comes to determining how far back an individual needs to go to correct their affairs. These require the individual to look back four years where they have taken reasonable care, six years where reasonable care was not taken, and up to 20 years where they deliberately misled HMRC about their income or gains or there has been a failure to notify HMRC of a new source of income or gains. 

It’s worth noting that Bitcoin – the original cryptocurrency was first launched on 3 January 2009, which effectively sets an upper limit to cryptoasset disclosure of 14 years. 

Long-standing investors who have not previously come forward to HMRC may also note that HMRC’s early guidance on cryptoassets was brief, and implied investing in cryptoassets was gambling rather than a taxable activity. It was not until 2018 that more detailed guidance for individuals emerged, first as a series of policy documents and then as a more detailed manual. 

Is this the right disclosure route? 

The cryptoasset disclosure service is intended for individuals with historical income tax or CGT to disclose. Where the income or gains relate to 2022/23 there is still time to submit a return, and for 2021/22, still time to amend a previously submitted return that is incomplete.

Where undeclared tax remains, it is not compulsory to use this route and individuals with more complex affairs – or any other undisclosed taxes unconnected to cryptoassets – might want to take professional advice on whether or not some of the other disclosure options might be more suitable. 

These routes include: 

Future measures

This campaign is unlikely to be HMRC’s final word on the subject of cryptoassets. At the March 2023 Budget, the government announced that for 2024/25 tax returns onwards, cryptoasset disposals will need to be separately identified in the CGT pages. This should make it easier for HMRC to identify when disclosures have been missed and take action.

Further down the line, from 2027 HMRC should also start to receive information about transactions from cryptoasset platforms under the Cryptoasset Reporting Framework (CARF). A total of 48 countries, including the UK, have signed up to the CARF. This will build on existing data exchange protocols for bank interest such as the Common Reporting Standard. 

The net is definitely tightening on anyone with cryptoassets who has not made all the relevant disclosures to HMRC. Anyone who has not yet disclosed their income or gains from cryptoassets should act now.

Replies (3)

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By FactChecker
22nd Dec 2023 18:56

The Research Note is rather vague with regard to its sampling methodology ... so it's hard to check the source (or indeed reliability) of the assertion that "around 4.97m UK adults (roughly 9% of the population) held cryptoassets one year ago"?

What it does reveal looks (to me) like very poor methodology:
- "a random online sample of 2,337 UK adults" (how random and selected from what pool is not disclosed); and
- then only asking questions of the 91% "who said they are aware of cryptoassets"!
Worse, they then showed a longer version of the questionnaire to "1,027 individuals selected from YouGov’s research panel (to boost the sample with adults that were current or previous cryptoasset users)"!
[This was to "guarantee that the longer questionnaire was put to a large enough sample of current or previous holders of cryptoassets and so representative of cryptoasset users."]

Basically 'randomness' seems to have been abandoned early on ... and any extrapolation from this base (to 'estimate' a %age of the whole UK population of adults) is mightily suspect.
.

All this is a shame because Helen raises a number of interesting questions that are in danger of being lost (on HMRC not just on readers here) if policy is being built on unreliable (understanding of the) foundations.

My main takeaway is that at the moment when HMRC and the general population talk about cryptoassets, they are like that old saying about Americans and the English ... 'two nations divided by a common language'!

Thanks (2)
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By JustAnotherUser
02nd Jan 2024 09:56

the methodology is a little wild agreed...

HMRC could simply tell people how many disclosures companies like coinbase make each year, they have to share user details who have cashed out more than £5,000 in a given period... someone drop a FOI request in?

We could use other methodology, none being an exact science but starts to get us into a ballpark...
-2023 6.4% of traffic was from the UK to coinbase.com (just 1 exchange)
-Coinbase had 108 million users in 2022 would equal 6.912 million

Or go wider.... globally...
the total number of unique addresses on the Bitcoin network as of Aug. 16, 2022 hit 1 billion, 1.2 billion as of today have been used.

Or look into other sources..

https://triple-a.io/crypto-ownership-united-kingdom-2021/ 5%
https://www.finder.com/uk/cryptocurrency-statistics 6%
https://yougov.co.uk/topics/economy/trackers/how-many-brits-have-bought-... 11%
https://publications.parliament.uk/pa/cm5803/cmselect/cmtreasy/615/repor... 10%
https://www.forbes.com/uk/advisor/investing/cryptocurrency/cryptocurrenc... 10%
https://www.hughjames.com/services/cryptocurrency-digital-assets/ 3.3m
https://www.thetimes.co.uk/article/crypto-buyers-get-24-hours-to-change-... 5m

Thanks (0)
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By listerramjet
03rd Jan 2024 09:36

Presumably they should be referring both to gains and losses!

Thanks (3)