HMRC offers a CARROT, but is holding a Stick(man) behind its back

On 29 November 2023, HMRC launched a campaign targeting crypto assets. Specifically, the campaign is focussed on undeclared tax in relation to this particular asset class.

HMRC considers that the loss or profit on the buying and selling of exchange tokens should be subject to capital gains tax.

Guidance provided by HMRC states that only in exceptional circumstances will it be accepted that buying and selling of crypto will amount to a trade for tax purposes.

Dawn Register, head of tax dispute resolution at accountancy and business advisory firm BDO, said:

“The launch of this new disclosure facility highlights HMRC’s concern about non-compliance among crypto asset owners and underlines its determination to recover unpaid tax.

As ownership of crypto assets tends to be concentrated among young adults, much of this non-compliance may stem from people simply not knowing or understanding their tax obligations when it comes to crypto. This facility could therefore be a very useful opportunity to rectify past mistakes.

Individuals will need to get reports from their financial advisers or online platforms to understand their tax position. In certain circumstances, those affected would do well to seek specialist advice on the most appropriate disclosure facility to use.”

While taxpayers have previously been able to use HMRC’s disclosure tools to declare unpaid tax, this is the first time it has launched a tool that focuses on crypto asset owners.

This step follows the announcement from HMRC that from 2027, crypto platforms will be required to begin sharing customer information in the UK.

The UK will be the lead on this project, called the Crypto-Asset Reporting Framework.

However the disclosure mechanism isn’t as straightforward as it appears. A key issue is how to classify crypto assets; Are they property or currency?

When crypto is sold for profit, CGT should be taxed as they would be on other assets.

Purchases made with crypto will be subject to the same sales tax or VAT that would be applied for cash transaction. So classification of the asset and how it has travelled through transactions may alter its tax status, and indeed its tax point.

Rough estimates suggest that a 20% tax on capital gains from crypto would have raised about 100 billion USD worldwide, with soaring prices in 2021. 

Crypto prices have tumbled since then, but looking at the above estimate, the amount of tax being lost through evasion and avoidance, often based on lack of knowledge, is still in the billions.

The volatility recently in crypto prices has fed anxiety amongst users and the authorities, while the appeal has been reflected in crypto becoming more and more associated with unlawful activities.

It’s not hard therefore to see why HMRC has suddenly taken a more focussed approach towards tax on crypto. There is an unexplored and untapped tax stream for HMRC to investigate and crypto has been on the lips of the FCA and SFO really since crypto became a thing.

With this new campaign, it is not hard to imagine a situation where HMRC allows a period of grace for users to come forward and pay what tax they owe on their assets, but that after that period, HMRC, the CPS, the FCA, the SFO and so on, will engage in an aggressive campaign, focussing on alleged tax fraud concerning crypto assets. 

Another possible consequence is that users start using decentralised exchanges, or peer-to-peer direct transactions, making discovery and analysis of taxable assets almost impossible.

The intention behind the campaign and OECD is laudable, but crypto and the users of crypto have time and time again demonstrated how quickly things can change, and innovation can happen rapidly.

Unfortunately, we all will be hearing about crypto for the foreseeable future. It just may be that rather in the financial and investment pages of the news, we will be reading about it in the context of court reports and civil and criminal trials and tribunals.

Given what is happening, anyone who may have unreported gains to declare should seek professional support and advice before using the voluntary disclosure facility, as the tax treatment of crypto is complex and years of unpaid tax may be payable. If additional tax is due, then HMRC will also charge late payment interest on that also.

Early engagement with financial and legal professionals is a vital step that no one dealing with crypto can afford to overlook.