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Cryptocurrency: A new wave of compliance activity

Author: Markel Tax

Published: 10 Sep 2021

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John Lewis, Senior Tax Consultant at Markel Tax, looks at an area of compliance activity that has been of increasing interest to HMRC in recent years and reflects on the modern world that we live in leading to the innovation and development of cryptoassets or cryptocurrency.

The rise of cryptoassets

Very little was known about this area a decade ago. Cryptoassets, more commonly known as cryptocurrency, now appear to be at the forefront of business and commerce. We see some of the world’s most valuable companies and some well-known individuals holding significant amounts of cryptoassets with others beginning to accept them as payment for the provision of goods or services.

HMRC does not consider cryptoassets to be currency or money, hence the terminology they have decided to use. They do, however, consider that any gains made on the disposal of these assets are taxable, and similarly, any genuine losses would be allowable. In the vast majority of cases, particularly for individuals, this will be under the Capital Gains Tax Regime.

Therefore, notifying HMRC of any gains or losses will typically follow the usual rules for individuals. You must notify your liability to tax on gains made within six months of the end of the tax year in which they arise. Losses however can be claimed up to four years after the end of the tax year in which the loss was made, but they must be claimed before they can be utilised.

To highlight the rise of this area, we note that one of the most well-known cryptoassets – Bitcoin – saw dramatic increases in value during 2017 and 2020. Investors stood to make significant gains if they had disposed of tokens during these periods. For the latter, there may still be time to notify HMRC of the liability to tax. For the former, a disclosure is likely to be required.

What are HMRC doing in these areas?

HMRC’s compliance activity is increasing with the tax authority keen to be at the forefront of these relatively new areas. It will likely use its bulk data-gathering powers under Schedule 23 of the Finance Act 2011 to approach data-holders to assist it in this regard. These data-holders are likely to include cryptoasset exchanges.

For example, Coinbase recently confirmed it had provided HMRC with data of its customers who received more than £5,000 from cryptoassets in the tax year ended 5 April 2020.

By being proactive in checking your clients’ tax affairs are in order with regard to this relatively new area of investment and making any voluntary disclosures where appropriate, this will significantly reduce any penalties that HMRC may seek to impose.

Markel Tax have a great deal of experience in assisting in any necessary disclosures to be made to HMRC, achieving the best possible outcome for the clients we represent.

We can also help with any late claims for Capital Gains losses. Whilst the last Budget did not increase the rates for Capital Gains Tax, the recent report by the Office for Tax Simplification makes it clear that the rates are likely to remain under review and we may see some changes in the near future. With that in mind, ensuring Capital Losses are claimed correctly is a vital and prudent approach.

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We can provide specialist tax investigations consultancy in the following areas:

  • Code of Practice 8 & 9 enquiries (suspected serious tax fraud) including the Contractual Disclosure Facility (CDF)
  • HMRC compliance activity into individuals, partnerships and companies
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  • Disclosures required to be made to HMRC
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