ATT Technical Officer The Association of Taxation Technicians
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Cryptoassets: Holders nudged into CGT space

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HMRC has launched an educational campaign targeting those who have transacted cryptoassets, to highlight the need to consider Capital Gains Tax. What does this mean for cryptoasset investors?

26th Nov 2021
ATT Technical Officer The Association of Taxation Technicians
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I first wrote about reports of HMRC receiving information from crypto exchanges back in 2019. Using its existing information gathering powers, HMRC has received information from a number of crypto exchanges for 2017/18 onwards.

The Financial Conduct Authority has estimated that over 2.3 million adults in the UK hold cryptoassets – an increase of 0.4 million from the previous year - so no wonder HMRC is seeking to ensure that all those investing or trading in these assets are aware of the possible tax implications.

Educational approach

What is interesting is the apparently ‘soft touch’ of the HMRC initial letters, different versions of which have been sent to unrepresented taxpayers, represented taxpayers and agents.

We understand from HMRC that the letter is intended to be educational at this stage, designed to raise awareness amongst holders of cryptoassets about the potential CGT implications, which is the most likely tax at stake for those investing.

HMRC is particularly concerned that people are wrongly believing three common transactions to be tax free:

  • Selling cryptoassets for fiat money (i.e. government backed currency such as £ or $).
  • Exchanging one cryptoasset for another – using Bitcoin to buy Ether for example is a disposal of Bitcoin for CGT purposes.
  • Paying for goods or services with cryptoassets.

In all cases, these transactions will generally be disposals for CGT purposes. If you want to buy a real coffee with a virtual coin, this is treated as a disposal of the coin and could result in a (albeit modest) gain or loss for CGT.

Income tax

CGT is not though the only possible tax at stake here. Those involved in mining (the process of creating new ‘coins’ and processing transactions on the blockchain) could potentially be liable for income tax on this aspect of their cryptoasset involvement.  

What next?

Anyone who holds cryptoassets should consider whether or not they have any tax to declare. If they are happy they do not, the letter confirms that they don’t need to take any action – indeed HMRC is not expecting that everyone in receipt of the letter will have liabilities. Not everyone with cryptoasset holdings is a serious investor, and I suspect their information will include details of many people who are simply dabbling out of curiosity.

Those who do exceed their annual CGT allowance – or have losses to record – will need to contact HMRC to bring their affairs up to date.

Penalties

While the letter is focused on 2020/21 liabilities – where the deadline to report has not yet passed – there is the possibility that a recipient might realise they have undisclosed liabilities from previous years.

In terms of penalties, these are lower if disclosures are ‘unprompted’ as opposed to ‘prompted’ and the question arises as to whether this ‘educational’ letter will count as a prompt. HMRC has said that receipt of a letter does not automatically mean that any disclosures that follow would be considered to be prompted so this would be a question of fact, to be determined in each case.

Guidance

In terms of quantifying the tax due, there is no specific legislation dealing with cryptoassets but HMRC first published guidance in December 2018 in the form of various policy papers. In March 2021, HMRC pulled all the published material to date into a new manual and added new sections on staking, derivatives, betting and gaming.

While useful, the manual is not comprehensive. The types of tokens and possible transactions are constantly evolving and we are awaiting guidance on developments such as ‘DeFi’ (Decentralised finance – more complex cryptoasset based investment products) and NFTs (non-fungible tokens which are ‘unique’ coins, usually representing art works –google them, it’s baffling).

Exclusions

One group of people who might expect a letter but won’t receive one, are non-domiciled individuals. This should not be taken as an inference that there are no tax issues here – HMRC is firmly of the view that UK resident non-domiciled individuals are subject to CGT on their cryptoasset gains.

The sticking point in connection with non-domiciled individuals is situs – the rules which determine where an asset is considered to be located. This is straightforward for an asset class such as land, but not so clear for a virtual asset which is part of a code hosted on a globally distributed network of computers.

HMRC’s current position – which is not universally accepted – is that the situs of the assets depends on the residence of the individual who owns the cryptoasset. We understand that non-doms have been left out of this educational campaign to avoid any controversy from distracting from the wider purpose of the mailings.

However, given HMRC’s clearly stated view, non-domiciled individuals still need to consider their position carefully.

Summary

Cryptoassets are here to stay, and no one should be in any doubt that there are real tax consequences to consider. For those in receipt of an educational letter, there will be a dedicated team at HMRC to take calls and emails, and anyone unsure of their position would be wise to take advice.

Replies (7)

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By Justin Bryant
26th Nov 2021 17:02

A waste of postage that. What % of these people will (properly) declare their gains? I would be amazed if it's more than 1%. A classic recent example of someone (an accountant no less) not understanding the above basic CGT issues is here: https://www.accountingweb.co.uk/any-answers/portuguese-tax-residency

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By Hugo Fair
26th Nov 2021 19:49

Q: Why is this a waste of time?
A: "HMRC is not expecting that everyone in receipt of the letter will have liabilities. Not everyone with cryptoasset holdings is a serious investor."

There isn't anything in the article (or presumably HMRC's sights regarding cryptoassets) that couldn't have been said equally about, say, holding savings in a foreign currency. But anyone I know who keeps a few thousand in, typically, US$ and from time to time extracts say 10% of the account as UK£ ... doesn't regard this as a trading activity - and certainly doesn't declare it (as a gain).

What is different with cryptoassets is the volatility of the 'coins' and the sense that it's all part of the virtual (not real) world ... so a little 'dabbling' can quickly turn into an undisputed trading activity - but, like the frog in the gently heated water, the taxpayer doesn't feel the change.

Perhaps HMRC would be better providing clearer definitions of things like 'a serious investor' before focussing on the latest buzz-word ... but then that would be both logical and helpful so I guess it's a non-starter.

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Replying to Hugo Fair:
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By Justin Bryant
28th Nov 2021 18:08
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Replying to Justin Bryant:
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By Hugo Fair
28th Nov 2021 19:19

Whoops, there I go falling behind the times again ... but thanks for the update! At least that explains why my acquaintances aren't declaring the gains.
But I still think my final para stands.
Otherwise what happens when some lucky s0d buys a grand's worth of bitcoins, watches as they treble in value over a few months and then spends 10% of them in purchasing a mobile phone (thereby only costing £100 of initial investment but obtaining a £300 phone)?
Or rather, what does HMRC expect to happen (given that nothing actually will)?

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Replying to Hugo Fair:
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By Justin Bryant
29th Nov 2021 09:02

But only the likes of the person in the above link would think otherwise (and granted there are plenty like him!).

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By raycad
29th Nov 2021 12:45

The whole area of Crypto "investment" is fraught with all sort of problems. There are those (like me) who believe that buying Bitcoin is no different from putting a grand on the nose on Fancy That in the 3.30 at Newmarket. But gambling has never been regarded as a taxable activity (except perhaps for so-called professional gamblers, who might be argued to be trading!)

And I shudder to think about the practical consequences when this South Sea Bubble eventually pops, as it is bound to do at some point, thus crystallising millions and millions in capital losses.

Interestingly on this last point, HMRC already regards CFDs (contracts for difference) as within the scope of CGT for "retail" investors, despite statistics from the CFD promoters themselves which show that between 70 and 80% of retail investors will lose money on CFDs. Is the game worth the candle, HMRC??

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Replying to raycad:
paddle steamer
By DJKL
30th Nov 2021 12:22

If they clean themselves out losing money on CFDs etc they may never be in a position to use the losses they generate.

The trouble with allowing retail investors to participate in effectively margin trading is that a lot of the participants are really, really, stupid.

(I once had a computer game where one could try all these exotic products, sometimes I won but very often I lost everything, at least with fully owned shares unless the company is effectively insolvent you usually still have something left, a share dropping 30% at least leaves you 70%)

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