Complex tax rules thwarting crypto investors

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Chris Etherington, RSM

Philippa Aylmer writes that with the HMRC starting to collate a database of cryptocurrency activities Chris Etherington, private client tax partner at RSM, discusses the tax issues that might affect those investing in cryptocurrency. 

“Individual taxpayers who are involved in cryptocurrency have a huge burden in terms of their reporting requirements,” states Chris Etherington, private client tax partner at RSM UK. 

Many of Etherington’s clients make millions of trades a year in different currencies and on multiple platforms so there are significant practical difficulties in pulling all the information together. “From an admin side, if you are trying to disclose several thousand transactions which is not uncommon on your tax return for the year, there is a high chance you will get something wrong,” he says, adding that the rules as they stand represent a barrier to HMRC being able to collect what is due “simply because you have people who see it as a daunting exercise to be able to calculate what is due.” 

Equally, the rules are complex which leaves the system open to interpretation and prone to errors. “It is down to the individual to interpret the current rules and make the best fist of those that do apply,” he states.

Etherington has seen non-domiciled individuals assume that their cryptocurrency investments will be treated as an offshore asset. However, HMRC stated – a few years ago – that non-domiciled UK residents who own crypto should treat it as a UK asset. “If you are a UK resident non-dom and you are not declaring your cryptocurrency gains, then you would inadvertently have not disclosed your income and gains to HMRC.”

The taxman does have wide ranging information-gathering powers, however. It can find out what people own, what they have earned and the gains they have made. And it is beginning to use these powers in the cryptocurrency space, collating a database of active individuals who are making large gains. It has just started issuing individuals with what have been described as nudge letters. But HMRC can also request information directly from cryptocurrency exchanges about individuals who have made gains of over GBP1000 in a year, for example. 

There are even potential problems with inheritance tax – although Etherington concedes that many crypto investors are not at the age where this is a major concern. “There are no special IHT rules for cryptocurrency which means that we are trying to overlay historic rules that relate to stocks and shares.” Etherington cites the volatility of cryptocurrency as the biggest threat where there are no provisions for tax relief. In stocks and shares and land, if there is a significant loss on those shares or land when one eventually sells them, then some tax relief is allowed. 

Etherington believes that the market is crying out for cryptocurrency legislation and that as with IHT, it should be thought of independently of stocks and shares. Firstly, because cryptocurrency trading is very different to traditional trading, both in technique and reporting, but also because legislation will make the UK a more attractive place for cryptocurrency investments as well as blockchain-related businesses. “We are receiving enquiries from people in their twenties who want to leave the country because the legislation is not clear and it is not considered a crypto friendly location,” he adds. 

While there is still a very small proportion of investors involved in cryptocurrency and many wealth managers are still very sceptical about the space, Etherington notes that a good proportion of his crypto investing clients who have made substantial, often life-changing net gains from crypto investing, are looking to transfer those gains into stocks and shares or property. “It is vital that there is a robust and efficient system in place for reporting on crypto profits, for funds to be verified that they come from a legitimate source and that they comply with AML rules. After all, no one wants want HMRC knocking on their door in 10 years’ time.”

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