Background
As you may be aware, HMRC have launched a cryptocurrency taskforce whose sole objective is to identify individuals who have failed to correctly declare their cryptocurrency gains correctly.
For the past year HMRC have been issuing information notices to cryptocurrency exchanges which they have and continue to use to prompt individuals to come forward and make disclosures.
A few recent examples of articles showing HMRC’s approach in the digital space can be found by HMRC confirming they have opened 20 criminal investigations into cryptocurrency and HMRC’s recent £1.4m non-fungible tokens seizure. If you would like to read more, links to the articles below:
Taxman opens 20 investigations into crypto assets
HMRC seizes NFT for first time in £1.4m fraud case – BBC News
Is my client at risk?
In general, for most individuals, the gains will be treated as capital in nature and therefore subject to an annual exempt amount. On that basis, small gains will have no tax implications.
The disposal however may become of an issue, and place your client at risk if the position is more complex, some of the common areas of error from our experience are:
- If the individual made a significant gain which either brings them over the Annual Exempt Amount or if they have had other gains which already exhaust the Annual Exempt Amount.
In these circumstances, the excess over the Annual Exempt Amount would result in a taxable capital gains charge at the marginal rate 10%/20%.
- If the individual is seen to be trading in cryptocurrency either as an individual or as a business;
Any gains on disposals (if it is established as a trade) will be subject to income tax as opposed to capital gains tax which, in most circumstances, will result in a tax charge being due.
The determinate of if the disposals should be treated as trading income is complex and based on case law. Whilst this cannot be placed in detail, if you have any questions on this area, our contact details are provided below.
- Misapplication of the situs rules of the disposal.
The situs rules for cryptocurrency disposals (where the disposal is located/taxable) is determined on the basis of the person’s residency. Therefore, if a client is a UK resident under the statutory residence test and they make a gain in the year, they will be subject to UK tax on the gain.
This means that it is irrelevant if an individual makes a purchase of cryptocurrency when they are non-UK resident and makes a disposal when they are abroad. As long as they are UK resident in the year, the disposal will still be subject to UK tax.
What can I do if an error is found
The key to ensuring your client’s tax position is correct and avoid any future issues is to take proactive action if any disposal are identified.
Failure to do may result in HMRC launching a long and intrusive enquiry into your client’s affairs, including investigating the source of the funds used to purchase the cryptocurrency and, if any issues are found HMRC will then be able to charge significantly higher penalties as a result of them prompting the person through an investigation.
To resolve this, dependent on your client’s specific circumstances there are several options they can take:
- Declare the amounts correctly in the next return (if the disposal was made in the 2021/22 year);
- Amend a previous return (if the disposal was made for the 2020/21 year and a tax return was filed); or
- Make a disclosure using HMRC’s Digital disclosure facility.
Obviously, there is no “one fits all” and dependent on the client’s circumstances more than one of the above, or all approaches may apply.
How we can help
We have and continue to assist clients in making disclosures to HMRC, including Cryptocurrency-based disclosures.
As we appreciate that it is a highly complex area, we are delighted to offer a free triage service on any issues that you may have in this area to give you the assurance that the right advice has been provided to clients.
If you would like help or if you have any queries regarding Cryptocurrency disposals, please contact info@independent-tax.co.uk or contact 01757 630010.
