Crypto tractor beam pulls in accountants

New figures on cryptoasset ownership due for release this month are expected to confirm a significant rise in the number of UK cryptoasset holders – up from the FCA’s estimate of 2.3m in June 2021.

As former ICAEW president Paul Aplin pointed out in his recent column, few practitioners will have escaped a question about the taxation of cryptocurrencies – whether they are keen on crypto or not. To help tackle some of the challenges this growing class of asset presents for accountants, AccountingWEB convened a panel of experts drawn from the worlds of accountancy, software, government and academia for a special Crypto Client Confidential show.

The regulatory and tax challenges of crypto

Gavin Brown, associate professor in financial technology at the University of Liverpool, started the show by defining cryptocurrencies – itself a difficult task given the fast-changing nature of the assets.

“They’re digital in nature and decentralised,” said Brown, clarifying that rather than money issued by a central bank or monetary policy committee, cryptocurrencies are controlled and maintained by a community of people – something that poses “regulatory and tax challenges”, according to Brown.

Dion Seymour, policy lead for cryptoassets at HMRC, said that while he had seen many changes to the market since starting in the role in 2018, it continues to develop at a rapid pace, which has put his 18 years of experience at the Revenue to the test.

In terms of how HMRC treats cryptoassets, Seymour pointed out that they are “an ever-evolving asset class”, which makes them different in many ways from traditional assets. 

“But we still need to think of them like an asset,” added Seymour. “They’re taxed based on their use by individuals and businesses, the same as any other asset class.” 

Pointing viewers to HMRC’s cryptoasset manual, which gives guidance on the legal tax treatment of cryptoassets, Seymour stated that when an individual or business buys and then sells tokens as an investment, HMRC would look at this as a chargeable gain and any gains they make will be subject to capital gains tax or corporation tax.

If an individual or business buys with sufficient frequency and organisation that they may actually be conducting a trade (the criteria for this is established in the courts and would include what HMRC refers to as the badges of trade), in this case, income tax or corporation tax would be charged on the arising profits. 

Knowledge gap for accountants

When considering some of the specific challenges for accountants around crypto, Liverpool University’s Gavin Brown pointed to the knowledge gap that isn’t a minor alteration to a sub-element of an accounting standard – it was an evolution of money itself, which is connected to all things in the accounting world.

“When you start pulling on that thread of cryptoassets you start to unravel all sorts of things you hadn’t originally thought of as a potential impact or consequence,” said Brown. “It’s really important to have professional services firms up to speed on this.”

He added that given the nascent nature of the market, basic terminology can be an issue, with many terms differing depending on jurisdiction or even company. “Perhaps the biggest challenge for accountants isn’t education, it’s complexity,” he said.

Ben Lee, business services and taxation partner at PKF Francis Clark, discussed some of the work his firm did with individuals and businesses in the crypto space. This includes providing tax advice to individuals who might have bought assets, held and sold them, right through to advising business clients on issues around banking and other aspects of cryptoassets that people have issues with. 

Lee pointed out that one particular challenge for firms is how to price services in such a new area. “Historically, people might have a stocks and shares portfolio; there might be software that pulls that in,” he said, but with cryptocurrency trading, it’s easy to rack up a huge volume of transactions that cause difficulties. 

The panel were also joined by Tony Dhanjal, head of tax at Koinly, a portfolio tracker and tax calculator designed to make taxes easy for investors and accountants.

He said that cryptoasset holders and their accountants are dealing with a fragmented source of information that needs to be aggregated. Harking back to his days in practice, Dhanjal compared the data from crypto users as similar to limited company bank account CSVs that needed to be lashed together to complete a set of accounts. The average Koinly user is now connected to three to five crypto wallets or exchanges, and as time goes on he expects this to rise, adding more complexity to the market.

The panel then took audience questions on a range of subjects, including how HMRC treats crypto mining, where the residency for tax purposes lies if the cryptocurrency is located outside the UK and what the VAT implications of selling NFTs are.

You can register to watch the webinar in full and subscribe to future shows by visiting the AccountingWEB Tech Pulse show page here.