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Why crypto is an opportunity for accountants

Author: ICAEW Insights

Published: 03 Feb 2023

With more and more people dipping their toe into the world of crypto, accountants increasingly need to become experts in crypto tax compliance and financial planning. Daniel Howitt looks at how.

Last year might go down in history as the year when crypto ‘collapsed’ – but serious investors, as always, are playing the long game. And they might not need to wait long to see signs of recovery either. Experts have already predicted crypto will bounce back in 2023 – and faster than traditional financial markets because it’s decentralised. 

Despite the turbulence that followed, including the FTX crash, Rishi Sunak’s government is standing firm on its ambition to make the UK a ‘global hub’ for crypto – good news for the 10% of adults that hold or have held crypto assets, according to a pre-crash survey by HMRC last summer. New regulations are about to be rolled out, including better consumer protection, which should instil confidence and open the market to more mainstream investors.

With this comes new opportunities for accountants to expand their expertise and proactively help their clients navigate the exciting and ever-changing world of crypto. 

Blockchain, the technology behind crypto, also promises to make the practice of accountancy so much more efficient, since it can provide a secure, transparent and accurate ledger of the ownership and transactions associated with assets.

Yet there are barriers to overcome too, not least the lack of education among members of the public. For example, clients may not realise that, unlike gambling, crypto is taxable. 

Meanwhile, accountants who are unfamiliar with the market and the language used could be nervous about advising their clients on their tax obligations, much less ensuring their investments are tax efficient. The problem is that crypto taxation is currently shoe-horned into a patchwork of existing legislation that doesn’t take its nuances into account. 

You might also be concerned about the anti-money laundering (AML) risks of taking on clients who hold crypto, concluding it’s probably easier to turn down their business. However, this could be short-sighted. From an AML perspective, ICAEW notes that there are “many similarities” with traditional assets such as cash and the “mere presence” of crypto doesn’t automatically make it a risk, although there are some additional considerations.

Where are we now?

Crypto is often referred to as an alternative investment – which might explain why there’s a disconnect between it and traditional assets. While some clients wilfully ignore the rules, others are genuinely unaware they need to declare their crypto activity, believing that they only pay tax when cashing out into a fiat currency. 

However, crypto investors should be under no illusions about their tax obligations. Using data from crypto exchanges, HMRC has been issuing ‘nudge letters’ to anyone who might need to file a self-assessment form (or include their gains/losses on an existing one).

What’s less clear is when this tax applies. Under existing rules, clients would most likely have to pay capital gains tax on gains above the current threshold (£12,300), but they would also be liable if they’re exchanging crypto-to-crypto (eg, from Bitcoin to Ethereum), including lending or giving away assets. Also, they would most likely have to pay income tax on the returns they receive from crypto activity, such as mining or staking.

Similar rules normally apply to non-fungible tokens (NFTs), such as those earned in games. Although there is no specific guidance from HMRC, they would probably be considered subject to capital gains. Although the position is very unclear, there may also be income tax on in-game earnings.

People often refer to buying and selling crypto as ‘trading’, but most are considered investors rather than traders under HMRC’s rules. Most likely, the disposals will be taxed under the capital gains tax regime and rewards generated from crypto assets (from locking them away in a yield-generating protocol) will probably be taxed as miscellaneous income. HMRC has compiled a list of instances when these rewards are deemed to be capital or income, with the caveat that there may be ‘other factors to consider’ in reality.

Crypto assets are also subject to inheritance tax rules, forming part of the deceased’s estate.

Still a minefield

None of this makes the work of an accountant – nor individuals completing their self-assessment – easy. I know because I once spent 40 hours trying to calculate my own crypto taxes, concluding that a spreadsheet wasn’t going to cut it. 

While standard crypto accounting software makes this task more straightforward, accountants must be attuned to the cyber-security risks and the legitimate concerns that many clients have. Any digital asset can be hacked – indeed, hackers have been blamed for losses of around $415m at collapsed crypto exchange FTX

When managing his own crypto investments, Ben Shepheard, who co-founded Recap with me, discovered that too many accounting products demanded that you share your transaction and wallet details to generate a tax report. 

Even though crypto tax calculations can be complicated, you shouldn’t have to tell a software company about the crypto assets you hold nor your trading patterns. All that matters is that you can determine how much tax is due after applying a fiat conversion. We have demonstrated that this can be achieved with end-to-end encryption, and by enabling users to connect to their exchanges using read-only application programming interfaces that aren’t visible to the software company or anyone else. 

A growing market

If new regulations prove effective, and the crypto market continues to move into the mainstream, accountants could see more of their existing clients getting involved and an influx of new business from crypto investors. 

Building expertise in the field helps you to create a point of difference – but you might first have to adapt your service to a different demographic, especially if you’ve historically dealt with older clients with traditional portfolios.

Because of its digital nature, it’s no coincidence that a quarter of crypto holders are aged between 18 and 24, and the majority are under the age of 45. The youngest have probably never worked with an accountant before and may have been surprised to receive a nudge letter from HMRC.

This is where you can support them with digital tools that allow them to seamlessly and securely share relevant information, without compromising privacy. Our platform, for instance, provides a single view of all of their transactions, trades and tax calculations in real-time, and you can instantly download an HMRC compliant tax report. All clients’ accounts are managed from your dashboard, or you can connect with individuals already using the software.

We want to demystify crypto and empower people so that they benefit from it. That includes accountants as much as investors. Compliance is the first step, but we also want our tools to provide insights that enable you to advise clients on how they could tactically dispose of depleting assets, reduce their tax bill and achieve their financial goals. 

  • Daniel Howitt isCEO and co-founder of crypto tax calculation service Recap

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