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How to start offering crypto tax services in your practice 

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With the increase in the number of people holding cryptoassets, many practices are starting to look at offering crypto tax as an add-on service or to attract new clients. So how should you go about productising and delivering the service? Tony Dhanjal, head of tax at Koinly, explores what skills and tools you need and how to charge for the service.

 

25th Jul 2022
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In the recent uptake and understanding report published by HMRC on 5 July 2022, only 10% of UK adults hold or held cryptoassets. Compare this to 33% in the USA and one can infer we are at the tip of the iceberg of crypto adoption here in the UK. 

Having the right systems – these clients are likely to be very digitally enabled

Robust systems and processes are crucial – you will want to ensure you are getting a decent return on effort/investment. A robust tech ecosystem goes a long way to achieving this and the ability to manage higher volumes of clients without compromising customer service. 

Your clients are likely to be younger and tech-savvy – literate and fluent in digital tech – so old clunky ways will simply not cut it. 

The process of turning raw crypto data, from exchanges, wallets or directly off the blockchain, into meaningful information and reporting needs to be as integrated, automated and seamless as possible. Get this wrong and it’ll be akin to pulling a 10-tonne trailer with a single horse! 

Classifying the revenue – is it trading, income or capital gains?

The majority of cases you encounter are likely to be capital in nature, and thus capital gains tax (CGT) provisions will apply. However, with the evolution of DeFi (decentralised finance), activities like staking and lending that culminate in rewards are subject to income tax provisions. 

An activity that is classified as trading in its own right, and therefore revenue in nature, is expected to be rare, according to HMRC (its cryptoassets manual sections 10000–60000 explains in more depth). 

Helping clients account for losses or manage gains tax efficiently

The first necessity is ensuring you have and can obtain up-to-date, almost real-time client information. Crypto markets move hourly and daily, and can swing wildly in a short space of time. A portfolio-tracking software that reports your clients’ big picture and connects to a wide universe of blockchains, wallets and exchanges through automated API links provides this agility. Only then can you help manage and advise your clients’ taxes efficiently, taking a holistic view including tax loss harvesting and negligible value claims, both of which will be prominent in a bear market. 

How to attract the clients

Anecdotally, the supply of crypto accounting and tax services is in its infancy – there is a vast blue crypto ocean needing many more ships to occupy it and yours could be one of them. Simple marketing, such as a website with a few SEO-friendly blogs along with a regularly updated social media presence, should start getting you noticed. 

If you’re already in practice, no doubt your existing clients are the best place to start, if you haven’t already done so. Put in place an effective referral system and shout about it – word of mouth will spread quicker than you think and especially in the run-up to the 31 January self assessment deadline.  

What are the additional AML risks of crypto clients?

In my opinion, crypto is not a criminal’s paradise as the popular media narrative may suggest. Yes, illicit activity involving crypto is happening, but no asset or system is 100% impenetrable. As an obliged entity, you will have anti-money laundering (AML) responsibilities: identifying suspicious activity or transactions involving crypto is perhaps the greatest challenge. In a nascent space like crypto, with so many operating models, platforms and exchanges, most accountants are just trying to get their heads around the basics, let alone how to police crypto. In my opinion, I don’t feel the relevant authorities will take an aggressive approach in this space, at least not just yet.  

Should you focus only on clients using recognised exchanges?

According to HMRC’s uptake and understanding of crypto report, 81% of disposals were made through a centralised exchange – arguably the most recognised way to do so. Inherently, your client concentration will be here by default, but don’t restrict yourself to this (even if you try, it will be near-impossible). The average investor is connected to between three and five wallets, exchanges and chains, including non-custodial and decentralised exchanges (DEX). 

Should you accept payment in crypto?

It would demonstrate your practice is forward-thinking and resonates with the common practices of the crypto enthusiast if you accept payment in crypto. 

But beware – not all crypto is the same. Most are volatile and while they can be used as a means of payment, there are risks attached. You could be in a position where you receive £1,000 of bitcoin for your services, only for it to be worth £750 a few days later. 

Stablecoins pegged to GBP on the other hand are designed to be a stable means of payment, but do your research carefully because, as the recent Terra LUNA/USDT stablecoin collapse testifies, not all stablecoins are created equal either.

Tony Dhanjal is head of tax at Koinly, a software that offers reliable and accurate crypto tax reports for your accounting clients. Visit the Koinly website to discover more. 

Replies (6)

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By Hugo Fair
26th Jul 2022 15:10

"It would demonstrate your practice is forward-thinking and resonates with the common practices of the crypto enthusiast if you accept payment in crypto."

Is this an encouragement to test out the Gadarene Swine concept in real life - or just a throw away remark like all the disposable aspects of crypto?

Thanks (2)
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By JustAnotherUser
26th Jul 2022 16:07

Decent write up.

"In my opinion, crypto is not a criminal’s paradise as the popular media narrative may suggest" - Bravo, way to many tulip tooting naysayers about these days.

Do disagree on: "The first necessity is ensuring you have and can obtain up-to-date, almost real-time client information." This comes after a few steps, and once validated the client needs, it isn't crucial in all cases.

Yes, agreed. If <1% of your business is working in crypto, take payments in it, use the opportunity to learn.

Last years bull run still hasn't finished for accountants, those taxes still ned paying, the next bull run will see massive adoption, get prepared or fall behind.

Thanks (0)
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By Calculatorboy
27th Jul 2022 09:53

It's a huge ponzi scheme where the majority of transactions are just for speculative purposes ( ie greed) by those with the mentality of a lemming.

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Replying to Calculatorboy:
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By JustAnotherUser
27th Jul 2022 14:03

The article isn't about crypto, its about how to offer services to those clients in the crypto space.
If you read the article instead of 'oh here's another crypto article, let me just shout Ponzi' and even read the HMRC research article you would see that...

- 10% of UK adults said they hold or have held a crypto asset.

-53% of current owners had holdings of up to £1,000, with 7% holding more than £5,000 in value.

That's a lot of people going to need to pay Tax if they come to sell in the next 24 months.

If you don't wish to offer these service, or don't understand crypto, just ignore and move on like you would with any service that you don't offer.

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By Mark Lee
27th Jul 2022 10:05

I was a tad surprised by the headline here: "How to start offering crypto tax services" and later that "The first necessity is ensuring you have and can obtain up-to-date, almost real-time client information".

This is an otherwise great article and I appreciate where the author is coming from. BUT the FIRST necessity when considering offering new tax services is to ensure you understand the related tax law and practice.

To start providing crypto tax reporting services, let alone related advice, before you have the expertise is probably a breach of your PI policy, increases the risk of subsequent negligence claims and would be a breach of PCRT.

While you build up your knowledge, understanding and expertise of a new tax service, get help from early adopters and specialists. (Yes, of course, we have such members in the Tax Advice Network and you can find the expertise you need at: FindATaxAdviser.online )

Thanks (1)
Replying to bookmarklee:
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By JustAnotherUser
27th Jul 2022 10:47

"The first necessity is ensuring you have and can obtain up-to-date, almost real-time client information" - Like Koinly

I like most of the article, the part quoted is a sales pitch disguised as an article.

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