Crypto tax: A new frontier for digital accountantsby
With a growing number of clients turning to accountants for help with cryptocurrency calculations and record-keeping, should finance professionals take the plunge? And can software help?
Whether you see the world of cryptocurrency as a profitable playground, a reset for the bloated world of capitalism or a bubble that threatens to knock the Dutch tulip bubble into a cocked hat, with its rising popularity it’s tough for even the most bitcoin-averse accountant to avoid it completely.
The FCA’s latest estimate puts the number of cryptocurrency holders in the UK at 2.3m, a figure that’s rising rapidly. With the self assessment deadline fast approaching, accountants are bracing themselves for an influx of crypto-based enquiries.
In the past, many have been reluctant to take on clients in a space that is as complex as it is volatile. However, with digital currencies moving into mainstream, an increasing number of crypto-curious accountants are joining early pacesetters in taking on more clients in the field.
Since setting up his firm in 2016, Adrian Markey a chartered accountant based in Warrenpoint, Northern Ireland, has taken on a growing number of cryptocurrency clients.
“I often say to people I can tell when the Bitcoin price is spiking because the phone starts ringing,” Markey told AccountingWEB. “I had an interest in crypto from early on and was just in the right place at the right time. When Bitcoin had its first major spike back in 2017, that was the trigger for many early investors who’d made a lot of money to think about the tax consequences.”
Joe David had been running traditional accounting firm Nephos for eight years, but in 2021 decided to launch Myna, a dedicated blockchain and cryptocurrency advisory firm working with individuals and businesses.
“I believe in the space and the innovation it’s driving,” said David. “We launched Myna with three clients in April and have 113 now with 40 more in the pipeline. It’s grown exponentially and we knew it would. It’s a huge area for accountants - there’s a few of us taking up a very small percentage of what’s a massive market.”
HMRC tightens its grip
Given the trade volumes now seen in the UK, it’s understandable that HMRC is taking a more active interest in cryptocurrency. While no taxes apply specifically to cryptocurrency assets in the UK, the tax department has clarified that in the majority of circumstances, anyone holding them as a personal investment is subject to capital gains tax on their crypto profits.
Using its existing information-gathering powers, HMRC gathers information from a number of crypto exchanges and in November sent out nudge letters reminding those who have traded cryptoassets (as it calls them) to consider capital gains tax.
A constant challenge for accountants working with cryptocurrency clients is the fast-moving nature of the market. “Crypto changes every week,” said Markey. “If there’s a new product or coin, part of my job is trying to guess what HMRC are going to say about it.”
This point has been acknowledged in Whitehall, with the latest manual from HMRC suggesting its views “may evolve further as the sector develops”.
Software available, but challenges remain
A plethora of software has arrived to fill the void, with market leaders including Koinly, Coin Tracking, Crypto Tax Calculator, Accointing and BitcoinTaxes. The majority of such tools plug into wallets or cryptocurrency exchanges, allowing users or their advisers to extract data into their own record-keeping systems via API feeds or CSV file transfers.
However, as pointed out in a recent Any Answers thread, the nascent industry is facing up to any number of challenges. “Most of the ones out there are as clear as mud with a questionable audit trail,” wrote Richard Grant from Chart Accountancy, who has picked up 15 crypto clients this year, the majority of whom have made considerable gains.
A major concern for UK users is the unique way in which HMRC works out cryptocurrency gains, including its “bed and breakfast” rule borrowed from share trading. Many of the tools available are geared up for the American market and don’t translate well across the Atlantic for UK returns.
One issue repeatedly raised by those seeking to get a handle on transaction data is that exchanges often use different rates of exchange, resulting in different calculations. In a space that can see volatile swings over short amounts of time, these variances can make a significant difference.
It’s also difficult for exchanges to track assets moving between wallets and brokers. As an example, if a user purchased bitcoin on the Gemini exchange, transferred it to their wallet and then moved it to Coinbase, the second exchange wouldn’t know the original purchase price.
According to Markey, the best way to tackle unruly record-keeping is to reverse-engineer it. “You can reconstruct records by exporting each cryptocurrency exchange’s files,” said Markey. One issue with this is that each exchange gives a unique report. The challenge is getting this into a uniform format to allow us to run the calculations in line with HMRC rules.”
Volume can be an issue, with cryptocurrency users often engaging in large numbers of trades, making records even harder to get to grips with.
“I had a client a few years ago who developed a trading bot that turned £5,000 into £3m through volume of trade,” said Markey. “He started the first year with five million lines in the spreadsheet, then went up to 30m in the second. Unfortunately, Excel only goes up to about one million lines”.
Advice on software
Markey has tested many of the crypto tax tools available. Most of them are functional, but he thinks many are over-engineered: “They’re trying to cover all the bases and are not particularly user-friendly. While some claim to have an accountant portal, they aren’t really set up for accountants to use in any practical sense”.
For accountants looking to explore the software route for clients, he advises they make liberal use of the free trial option offered by many tools.
“Run some dummy numbers through the system and see how it works,” he said. “Make sure it does what it says it does. Double-check it lines up with the bed and breakfasting rules set out by HMRC. Check how it calculates exchange rates. Unless you’re planning to offer a service, make sure the client can use the software and send the reports. For the most part, my clients pay the sub fee and send me the CSV reports.”
For individuals, David’s firm mainly uses a combination of Swiss-German tool Accointing, Australian firm Crypto Tax Calculator and Koinly for the occasional client.
“We mainly use software,” said David. “The APIs pull through the transaction history and we then effectively run a bank reconciliation. It gets a little more complex when there’s no API to the exchange, so we’ll have to pull a CSV that needs manipulation because all exchanges use different terminology for transactions and so on. Then we have to collate the data, reconcile, export it and plug it into tax software.”
Markey currently does the majority of work in Excel. “I have a process and stick to it as it works,” he said. “I’ve had half a dozen investigations from HMRC, all of which have been accepted with no changes.”
While there’s a huge opportunity for growth, David admits that dealing with crypto taxation is not for everybody. “It’s not a simple space. Personally, I think you need to be passionate about crypto to specialise in it. You need to constantly educate yourself about it and be prepared to sacrifice what little free time you have as an accountant to do this,” he said.
Markey agreed: “The first step to advising clients on any aspect of their tax affairs is to understand the subject matter. Unless accountants are willing to educate themselves on cryptocurrency, NFTs [non-fungible tokens] and blockchain technology, they could end up doing more harm than good for clients. However, I believe cryptocurrency is only going to become more ingrained in our lives over the next 5-15 years, so it’s hard to see how accountants can ignore this space in the medium to long-term.”
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