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Crypto tractor beam pulls in accountants

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With a growing number of firms fielding queries on crypto calculations, HMRC’s policy lead for cryptoassets joined an AccountingWEB panel of experts to analyse the challenges this presents for accountants.

4th May 2022
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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.

Replies (9)

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ghm
By TaxTeddy
05th May 2022 07:22

At first I thought this would be the preserve of our more techie clients. But in fact all sorts of people seem to be dabbling, particularly those who I thought could least afford the risk.

So much so in fact that I have added detailed questions relating to Crypto, DeFi and NFTs to the CGT section of our 2022 tax return data request. Hopefully clients who do have activity in this area will have used proper tracking software, otherwise their tax return fees are going to be pretty high.

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By JustAnotherUser
05th May 2022 08:14

Good read, no scare mongering.
Agree on the sentiment that once the basic agreement is made to treat as an asset the easy part is over.
In 2021 crytpo went through another boom, its back to a low for the last few months, this will mean this coming self-assessment may see an increase in questions and panic from clients, as above these clients could have 1,000s of trades over multiple exchanges and varied rates....

Tokens (currency, utility, security..) NFTs, ICO's, air drops, staking... many different chains and wallets. Some of these trades may be on crypto held for years or just hours, spanning a number of tax years.... not all will be simple GBP > Crypto and vice versa... you will see BTC > LRC > ETH and more....
Koinly is great to help and I do recommend using this or an equivalent

Also expect KYC exchanges to share data with HMRC (expected in October 2022 ) and I also expect this year HMRC will have a better handle on how they communicate this back to individuals and potentially cause a mini rush on queries to accountants....

It would be great if AccountingWeb could query HMRC on when they expect to gather this exchange data and how they will handle it and contact individuals this year, allowing accountants to better prepare.
Also consider that leading upto the World cup we are seeing big sponsorship deals and Crypto will be front and centre, hopefully spurring the next boom.

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Replying to JustAnotherUser:
ghm
By TaxTeddy
05th May 2022 09:45

It's an interesting point that the exchanges will be sharing their data with HMRC - I hadn't considered that.

My first thought is to wonder what HMRC will actually make of the data? And do we think they will issue "nudge" letters in a responsible way? Nah. Scatter-gun approach, as always.

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By JustAnotherUser
05th May 2022 11:30

Nudges were sent November last year, so I suspect something similair, maybe HMRC have improved by then ...

I dont suspect anything more than a nudge, but with KYC and how public the blockchain can be, it is entirly possible with the right technology the right person could effectively calcuate who made what profit (or loss)... good thing for most people is that HMRC will never get it right.
This could be an entirely autmated process.

We have plenty of people in our group/s that made significant profits in meme coins like Doge last year (6 figures +), whilst we do warn about the nature of KYC and risk of not declaring, a lot feel untouchable, retain massive profts in crypto and never intend on moving back to GBP.
Will be keeping a close eye on what happens post nudge letters and if/when these cases ever begin to hit the courts.

"Coinbase agreed to share data with HMRC relating to customers who received more than £5,000 equivalent of cryptocurrency. This and similar access with other crypto exchanges allows HMRC far greater reach in terms of investigating tax errors or fraud."

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Replying to JustAnotherUser:
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By JustAnotherUser
05th May 2022 11:40

for anyone intrested,.....
Dogecoin had gained approximately 27,000% in just a six-month stretch between early November 2020 and early May 2021.

2,000 merchants now accept Dogecoin as a form of payment

4 million on-chain holders of Dogecoin. (global)

Anyone with just £50 in Doge prior to and cashed out in the above period would be getting a nudge letter from HMRC

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By MCV71
05th May 2022 08:15

I was a little wary of clicking on a link with the word "tractor" in it.....

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Replying to MCV71:
Caroline
By accountantccole
05th May 2022 09:12

It is where my mind went...

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By Hugo Fair
05th May 2022 13:56

At least it didn't dominate the article.

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Replying to MCV71:
Tom Herbert
By Tom Herbert
05th May 2022 16:15

Oh no! It hadn't even crossed my mind... Apologies to any MPs tuning in expecting racy content :-)

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