It is becoming more important than ever for crypto investors to become aware of their tax reporting obligations.
What are my reporting obligations?
This can be anything from income tax payable on mining, staking, and significant trading activities, to capital gains tax payable on simply exchanging one digital token for another.
If an investor buys and sells tokens on a regular basis, HMRC may also deem that individual as a self-employed trader, having to pay higher rates of Income Tax compared to CGT. It is vital to get the classification right. The tax rules surrounding cryptoassets can be open to interpretation, but getting this interpretation wrong can be costly.
HMRC’s response to crypto growth
The growth of the cryptoasset market has created significant challenges for HMRC in the past. They aim to keep up with the ever-changing technological space in order to tackle tax evasion, avoidance, and non-compliance.
In response, HMRC have recently introduced further plans via a targeted campaign to clamp down on crypto investors. Mainly those who may have unintentionally (or intentionally) slipped under the radar.
They are known recently to have sent over 8,000 nudge letters to individuals failing to disclose their crypto tax liabilities. Resulting in potentially collecting penalties of up to 100% of the tax due (or more if the holding was offshore).
This is just one of the potential consequences if people do not declare what they are required to, and is showing that their plans to accelerate investigations are fully underway.
There has also been talk that the government is proposing a penalty system for non-compliance. With one-off single penalties of up to £5,000 with subsequent daily fines of £600 for continued failure to comply.
Upcoming changes and measures
HMRC are planning to introduce a new crypto section on self-assessment tax returns to support those estimated five million crypto investors in the UK. They also launched a voluntary disclosure service last November for taxpayers to declare historic unreported matters.
In addition, HMRC is consulting on the implementation of global transparency rules, which mean crypto platforms will have to share client data with HMRC. The OECD’s crypto-asset reporting framework is set to be introduced fully from 2027, making it more likely individuals will no longer be able to evade the tax authorities’ attention. HMRC will use this data to identify non-compliance.
Seeking professional advice
If you have undeclared crypto liabilities, or were even unaware of your obligations, it is becoming more important than ever to ensure you are compliant with HMRC.
If you have received a letter from HMRC, we would highly recommend seeking advice from a tax professional.
Without access to professional tax advice, individuals can be caught out by the complex tax rules, which can be difficult to interpret as a layperson.
How can we support you?
Here at ETC Tax, we have a team of supportive advisers with the expertise to guide you through this process.
If you would like a free informal chat, please do not hesitate to contact us.
The UK tax treatment of Crypto income is a relatively new and complex area.
The issue
Our client wanted to know how a potential move overseas would impact his UK taxable income and assets. Specifically, our client needed to know the impact that moving abroad would have on any DAO tokens, which are received as part of his self-employment.
How we solved it
We assisted our client with providing personalised advice in relation to their UK tax residence status and the actions required to be considered a non-UK tax resident, to benefit from advantageous tax treatment. The client was previously unsure of what would be required to lose his UK tax residence status and we were able to help apply the complex rules to his circumstances.
The Outcome
We clearly set out the steps our client needs to take to be considered a non-UK tax resident and provided calculations to show the impact that this would have on any DAO tokens he receives.
Next Steps
Our expert team of tax advisers are here to support you with a range of tax services in relation to your cryptocurrency activity.
Whether you are just getting started or have been investing in cryptocurrency for several years, our team of tax specialists can provide bespoke advice to support you to achieve your objectives in a tax-efficient manner. Please do get in touch.
As the world eagerly anticipates the next milestone event in the realm of cryptocurrency, the Bitcoin halving is once again poised to captivate the attention of investors, enthusiasts, and analysts alike.
Scheduled to occur approximately every four years, this phenomenon, known as the ‘halving’. This has historically had a profound impact on the dynamics of the Bitcoin network, its price, and the broader crypto market.
As crypto markets change, so too do investors’ tax issues.
Whether it’s –
Reporting gains or losses subject to CGT
Reporting income from staked coins
The treatment of airdropped rewards
The impact of the Bitcoin halving increases the need to be on top of your affairs.
Understanding the Bitcoin Halving
To comprehend the significance of the halving, it’s essential to grasp its fundamental concept. Bitcoin operates on a deflationary monetary policy, with a fixed supply of 21 million coins. Unlike traditional fiat currencies, where central banks can print money at will, Bitcoin’s supply is algorithmically controlled through a process known as mining.
Mining
Mining is the process by which new bitcoins are created and transactions are verified on the blockchain. Miners compete to solve complex mathematical puzzles. The first to find the solution is rewarded with newly minted bitcoins and transaction fees. To maintain scarcity and control inflation, the reward for mining new blocks is halved approximately every four years. This mechanism known as the ‘halving’.
The Impact on Supply and Demand
The halving has a direct impact on the supply of new bitcoins entering circulation. With each halving event, the rate at which new coins are issued is cut in half. This reduction in supply serves to increase scarcity, aligning with the basic economic principle of supply and demand. As the supply of new bitcoins dwindles, assuming demand remains constant or increases, basic economic theory suggests that the price should rise. This anticipation of reduced supply and potential price appreciation often leads to increased speculative activity in the lead-up to the halving event (i.e more people buy into crypto, leading to increases in prices and bigger potential gains for investors.
Historical Precedent
Examining the historical data surrounding previous halving events provides valuable insights into potential market behaviour. Bitcoin has undergone two previous halvings, in 2012 and 2016, each followed by significant price rallies.
In 2012, the first halving saw Bitcoin’s price surge from around $12 to over $1,000 within a year. Similarly, after the 2016 halving, Bitcoin experienced a meteoric rise, peaking near $20,000 in late 2017. While past performance is not indicative of future results, many investors view these historical patterns as a bullish signal for Bitcoin’s price trajectory following the upcoming halving.
What does this mean for you as an investor?
The upcoming Bitcoin halving represents a pivotal moment in the evolution of the world’s leading cryptocurrency. With its potential to reshape market dynamics, ignite price rallies, and fuel speculation, the halving embodies the essence of Bitcoin’s decentralised and deflationary design and has historically led to massive gains.
As investors brace for the anticipated surge in price among the bigger coins like Bitcoin and Ethereum, the Altcoin market is the one which has the most volatility whether that’s significant gains on which tax will need to be paid, or losses which will need to be claimed. It’s important for all crypto investors to make sure their tax affairs are in order.
Next Steps
At ETC Tax, we specialise in the analysis of investors’ crypto activity and accurate reporting of gains, losses and income to ensure our client’s affairs are correct.
Crypto reporting and compliance update: make sure you’re ahead of the curve in ALL aspects of your crypto tax activities
Get your (crypto) affairs in order!
With around 50 countries planning to collaborate to compel crypto platforms to disclose information about their clients to tax authorities, it has never been as important as it is now to ensure your crypto tax affairs are in good order.
The OECD has recently introduced a new Crypto-Asset Reporting Framework (CARF). This means that crypto platforms are now obliged to share information with tax authorities about their clients. This obligation is something they’ve managed to avoid until now.
The regulations are set to take effect by 2027 for data exchanges in around 48 countries. This includes prominent ones like the UK, Australia, US, France, Germany, Canada, Japan, Korea, and the Cayman Islands.
The 48 countries that have signed up for CARF all have very active crypto marketplaces. They have stated that they are keen to incorporate CARF into their national laws. Keen to act quickly so as to ensure greater transparency.
The global surge in crypto has led to an increase in tax avoidance. Estimates suggesting non-compliance for cryptoassets could be as high as 55% to 95%.
The aim of this initiative is to provide tax authorities with information from other jurisdictions, ensuring better overall tax compliance.
The UK authorities alone have estimated that they stand to recover hundreds of millions of pounds in lost revenue as a result of CARF. They have agreed on a historic joint statement with the other 48 participating countries. This will help combat individuals who they believe are using crypto to evade billions in taxes.
The CARF will enhance the existing Common Reporting Standard. This system is currently used by tax authorities to exchange information on taxpayers with offshore assets.
Burst the (crypto) bubble!
With bitcoin having doubled in price in the last year, from around $16,000 to just over $37,000 at the time of writing this article (13th November 2023), it is clear that the crypto bubble is far from burst. Many would have us believe, meaning that getting your crypto tax affairs in good order is more critical than ever.
Next Steps…
At ETC Tax, we have been assisting clients with their crypto tax compliance since 2017. We have significant experience in all things crypto. If you would like help with anything crypto-related please do not hesitate to get in touch.
13 years ago, on 22 May 2010, bitcoin was used for the first time to buy something.
This seminal event was carried out by US computer programmer, Laszlo Hanyecz. He decided to use some of his hard-earned bitcoin to buy a pizza. We are unsure of the topping, but that seems unimportant.
There was one flaw in this plan.
No one accepted bitcoin as payment.
However, not letting this fact get in his way, Laszlo posted in a forum the following:
“I’ll pay 10,000 bitcoins for a couple of pizzas… You can make the pizza yourself and bring it to my house or order it for me from a delivery place, but what I’m aiming for is getting food delivered in exchange for bitcoins…”
His crypto cry for help was answered by a student called Jeremy Sturdivant. They finalised the deal and Laszlo paid Jeremy the 10,000₿ for two Papa John pizzas.
At that time, 10,000₿ was worth about twenty quid.
As of 22 May 2023, this is worth nearly £216m! However, just over a year ago, it was over £238m (£450m in 2021)!
In 2021, we were told that Tesla had invested over $1bn in bitcoin. Further, we were told that you could buy your very own brand new Tesla using cryptocurrency.
However, it appears that Elon Musk has done a volte-face on bitcoin – withdrawing the ability to use bitcoin as a medium of exchange as quickly as he had advertised it. We are told that this is due to the fact that the well understood energy costs of mining bitcoin was out of kilter with the green vision of Tesla.
However, I strongly suspect that it was the realisation that bitcoin simply was not the right medium of exchange for him to buy his favourite takeaway.
Bearing in mind his green credentials and the size of his foray into crypto, it is certainly as plausible as the official reason!
ETC Tax are leading tax advisers in the crypto asset space. If you are a crypto investor, trader, or miner involved in any crypto funds or want some advice on how to buy a pizza with bitcoin, then we would be happy to assist. Please do not hesitate to get in touch.
The Treasury Has Released Its Proposals For Regulating Cryptocurrency
The UK Treasury has recently proposed regulations for the rapidly growing crypto market. This isin response to the widespread calls for action following the sudden bankruptcy of one of the world’s largest trading exchanges, FTX.
The proposals promise a “robust” approach to digital assets. Which will align with traditional finance standards and provide greater protection to investors.
Under the government’s plans, crypto platforms will become responsible for defining the criteria that a currency must meet before they list for trading.
Exchanges are accountable for securely facilitating transactions and ensuring the safety of customer assets.
The recent bankruptcy of FTX has left around 80,000 UK-based customers impacted. It has further highlighted the need for regulation in the crypto market.
The deputy governor of the Bank of England has described the crypto trading market as “incredibly volatile” and “too dangerous” to remain outside of mainstream regulation.
Criticism About The Plans
The proposals are criticized by Labour for being too late. The crypto industry struggles to regain the confidence of investors following the collapse of FTX.
The wider market turmoil has resulted in Bitcoin, the world’s largest token, falling to a five-month low. Now, major exchange Coinbase cutting 20% of its workforce.
Despite the recent challenges, the government remains committed to enabling the growth of crypto. But emphasizes the importance of protecting consumers who are increasingly embracing this new technology.
The proposed regulations will first be submitted to a consultation period before being implemented.
The Treasury claims that the regulation will be a “world first,”. It is expected to arrive before the EU’s anticipated crypto legislation in 2024.
In the meantime, the Treasury has announced a time-limited exemption to allow more crypto asset companies to issue promotions. This came following a crackdown on “misleading” advertisements.
Only companies who register with the Financial Conduct Authority for anti-money laundering purposes can issue promotions while they introduce this broader regulation..
In The Works
Crypto fraud expert Louise Abbott, a partner at Keystone Law, has welcomed the Treasury’s proposals. Abbott has seen a dramatic increase in crypto scams and fraud in the past 10 years. They believe that the lack of regulation in the crypto market has made it attractive to fraudsters.
Abbott hopes that the regulation could be in place as soon as this summer, and believes that greater oversight of the market is in the best interest of both exchanges and investors.
They put a stop to the world’s largest crypto exchange, Binance, in the UK in 2021. They welcome Treasury’s announcement and state the regulation is “essential to establishing trust and supporting innovation.”
Varun Paul, former head of fintech at the Bank of England and now with crypto infrastructure provider Fireblocks, described the plans as a “positive step” and expressed hope that the UK’s regulation would provide clear rules while still encouraging innovation in the crypto market.
Conclusion
The UK Treasury’s proposed regulations for the crypto market are a much-needed step towards establishing a more secure and stable trading environment for both investors and exchanges.
The lack of regulation in the crypto market has left it vulnerable to fraud and market turmoil, and the proposed regulations aim to address these concerns and build greater confidence in the crypto industry.
The crypto market is rapidly growing and has the potential to revolutionize the financial industry, and these proposed regulations will play a critical role in ensuring the long-term growth and stability of the crypto market.
Next Steps
If you have any general queries about this article or questions about cryptocurrency & tax please do not hesitate to get in touch.
