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Business Services  •  Personal tax

Time to declare cryptogains

By RJP LLP on 22 January 2024

Research compiled by the Financial Conduct Authority (FCA) revealed that 9% of UK adults (4.97 million people) owned cryptoassets in August 2022. This is double the amount recorded in 2021, when 2.3 million people or 4.4% of adults were investing in cryptoassets. In 2018 the government clarified its position on tax and cryptoassets, confirming that gains from investments in cryptoassets attract CGT (capital gains tax) just like many other investments.

Thanks to the growth in the number of people investing, HMRC is becoming more interested in tracking potential tax underpayments and has launched a new voluntary disclosure facility for people who have unreported gains from cryptoassets. Operational since November 2023, the cryptoassets voluntary disclosure opportunity enables individuals with undeclared capital gains tax (CGT) or income tax relating to cryptoassets to come forward and correct their affairs. This latest campaign formalises earlier approaches made by HMRC when it sent letters to selected taxpayers who it believed own cryptoassets, but who had not declared any income or gains.

What needs to be declared?

If you own cryptoassets as a personal investment and sell them for a profit, this is classed as a capital gain, is subject to CGT and must be declared, with any tax owing paid. HMRC makes a distinction for tax purposes between investing and trading. If you are holding cryptoassets and only selling infrequently, this is classed as personal investing for capital appreciation purposes. The vast majority of taxpayers would not be classed as “trading” in cryptoassets (hence chargeable to income tax on profits) because they would not be buying, selling and exchanging tokens with sufficient frequency.

Many taxpayers are not aware of their obligations when it comes to reporting on cryptogains for CGT purposes. The following scenarios all potentially trigger a CGT liability:

• selling cryptoassets in exchange for a regular, “fiat” currency e.g. UK sterling or dollars;
• exchanging cryptoassets for other cryptoassets;
• gifting cryptoassets to anyone other than a spouse or civil partner;
• using cryptoassets to buy goods or services.

The confusion surrounding cryptoasset taxes is further complicated when dealing with so-called DeFi (decentralised finance) activities. These use emerging technology e.g. blockchain, to remove third parties and centralised institutions from financial transactions. In an attempt to make their cryptoassets work harder, some investors are using DeFi networks to lend or “stake” them, in return for earning “interest-like” rewards. Taxation of DeFi investment activities is currently under consultation and an announcement about future tax implications will be coming from the government.

CGT allowances are reducing

Presently most taxpayers who have cryptogains should not be overly concerned about whether they owe CGT. The FCA has published data showing that the average amount a UK investor has tied up in cryptoassets is £1,595. In the tax year 2022-23, for which tax is due on 31 January 2024, the annual CGT exemption was £12,300. This reduced in 2023/24 (tax payable by 31 January 2025) to £6,000 and it will halve again for 2024/25 (tax payable in January 2026). This means that although it might not be an issue yet, it may become one in the future and investors should become more aware of their CGT liabilities in relation to cryptoassets.

How far back should I go?

If you have made a mistake and not declared CGT on cryptogains, there is a set timeframe for retrospectively checking and correcting your tax returns. If you can demonstrate having taken ‘reasonable care’ to avoid a mistake, the timeframe is 4 years. If you cannot demonstrate taking reasonable care the timeframe is 6 years and if you have deliberately misled HMRC and committed a fraud, the timeframe is 20 years. Note that in the case of cryptoassets the maximum time period would be 14 years, based on when Bitcoin first launched. Additionally bear in mind that HMRC fully clarified its guidance on the taxation of cryptoasset investments in 2018, which means that it could be argued that the maximum timeframe for rectifying deliberate errors is 5 years.

If you have been investing in cryptoassets and have gains to declare for the 2022-23 tax year you have until 31 January 2024 to submit a tax return. It is also possible until 31 January 2024 to amend a return that has already been submitted for 2022-23 or for 2021-22. If you fall outside this timeframe, it will be necessary to make a voluntary disclosure.

In the future, you can expect that HMRC will be monitoring cryptoasset investing much more closely. Starting in the 2024-25 tax return period, cryptoasset disposals will need to be separately identified in the CGT pages of tax returns. Then from 2027, HMRC plans to obtain transaction data directly from cryptoasset platforms under the Cryptoasset Reporting Framework (CARF). This will build on existing data exchange protocols in place with banks, building societies, rental agents and ecommerce platforms.

If you want to use one of HMRC’s disclosure facilities, we recommend you seek professional advice beforehand. For more information or advice about tax compliance and using disclosure facilities offered by HMRC please email us via partners@rjp.co.uk.

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