10th December, 2021 I’m often educated by my law trained business partner as to…
Crypto Tax- What can we learn from the US?
2nd July, 2021
Crypto Tax- What can we learn from the US?
The big news in the crypto world this week was that the Financial Conduct Authority (“FCA”) have ordered Binance, one of the world’s largest cryptocurrency exchanges, to cease regulated activity in the UK. While the FCA gave no explanation for the move, they have required all firms offering cryptocurrency-related services to register since January 2021 and show they comply with anti-money laundering rules.
One of the challenges that the FCA and the UK government have had to face with cryptocurrencies is determining who the end user is. The concern is that crypto is being used for tax evasion and other illegal activities. While it appears that cryptocurrency operates in an anonymous digital world, there are ways that HM Revenue & Customs (“HMRC”) can follow the money back to the taxpayer.
Learning lessons from other countries
HMRC appear to be relatively late to the party when it comes to obtaining information in respect of taxpayers cryptocurrency affairs. In October 2020 they issued a legal notice to Coinbase to disclose information on its users with more than £5,000 worth of crypto assets on the platform during the 2019/20 tax year. In comparison, the tax authority in the United States, the IRS, previously undertook a similar initiative with Coinbase in December 2016. In December 2016, the IRS issued summons demanding Coinbase to produce a wide range of records, which resulted in disclosure of 13,000 US customer records to the IRS.
The IRS now have a variety of tactics to detect cryptocurrency investments and unreported income – tactics that HMRC can learn from and implement themselves.
For example, the IRS now have agreements with major exchanges like Coinbase, Gemini, Uphold, Kraken, and others to report certain customer activity to the IRS using certain US tax forms (form 1099-K and/or other related 1099’s). If the IRS receives a tax form from the crypto exchange but sees no cryptocurrency income reported on the tax return, the taxpayers account will be flagged and an automated letter will be sent alerting of non-reported income and potential tax liability.
The IRS have also partnered up with crypto tax service provider TaxBit on a one year contract to help audit entities and individuals. The IRS will provide TaxBit with information they hold in respect of cryptocurrency users to determine if high volume traders correctly reported all crypto transactions on their tax returns. TaxBit will use their software to analyse the information provided to them to determine if there any tax gaps.
It is not just the US that have identified innovative methods of identifying unreported cryptocurrency income and gains. The Australian tax authority uses data from banks, financial institutions and cryptocurrency online exchanges to follow the money back to the taxpayer. South Korea is taking a particularly hard line when it comes to crypto. This year they seized over USD 47 million in crypto from approximately 12,000 people accused of tax evasion. South Korean investigators used mobile phone numbers to track down the alleged tax evaders as local crypto exchanges did not collect registration numbers of the account holders.
Tools available to HMRC
Despite being slow off the mark compared to other countries around the world, cryptocurrencies are now definitely within HMRC’s sights, with them regularly updating their guidance on the tax treatment of crypto assets (this can be found here)
HMRC also have a plethora of existing tools that can assist them with identifying unreported income and gains including those arising from crypto. They have a power that was introduced by Sch. 23 of Finance Act 2011 that allowed HMRC to easily obtain bulk data from “relevant data holders”, that includes a large range of different sources. A more detailed look into this can be found in an article written by my colleague Thomas Wallace, which can be found here.
HMRC also has their powerful Connect computer system that identifies and cross references information from a wide range of sources that includes government data bases, social networks and online retailers such as eBay. This tool has the capabilities to pick up references to crypto and will help inform HMRC’s decision to potentially open enquiries into an individual’s or businesses tax affairs.
Despite the popular view that cryptocurrency users are anonymous this is becoming less and less true as tax authorities around the world realise that tax can be collected from income and gains arising on crypto assets. Despite lagging behind some overseas tax authorities, HMRC have crypto firmly in their sights.
HMRC are looking to tax crypto assets and could even charge penalties if they are not properly reported. HMRC have tools available to them to help identify where people are holding crypto and can also learn from measures put into place by overseas tax authorities.
If you hold crypto assets and would like to discuss the potential tax implications, please do get in contact with me at firstname.lastname@example.org
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