Crypto traders – are HMRC coming for you?

Eight years does not sound like a long time in the context of stock markets, but for crypto traders, it’s an eternity.

On 6 April 2014, there were 210 tokens listed on CoinMarketCap, with the price of Bitcoin at $460.50.

The overwhelming majority of those tokens are no longer talked about today, with the projects having failed or proven to be exit scams.

By the end of November 2021, there were almost 10,000 currencies listed and the market capitalisation exceeded £3 trillion for the first time. This has been largely driven by the increasing number of retail investors and venture capitalists flowing into the space.

My experience with crypto

I was first introduced to cryptocurrency in January 2021 by my partner.

After an initial £50 investment in Cardano (to test the water) became £75 in a very short timeframe, the floodgates opened. What followed was two months of throwing everything bar the kitchen sink at a plethora of tokens. The boredom of lockdown had taken its toll and this was a new and interesting way of filling in time whilst the pubs and restaurants remained closed.

Unfortunately, successes have been few and far between, as I have watched my accounts rise rapidly and fall even harder. The slightest sniff of negativity in the form of a tweet by a popular influencer can send prices spiralling downwards.

I have been through every conceivable emotion possible during my short time investing.

The future is blockchain

There are many detractors who will claim that crypto is a Ponzi scheme waiting to collapse at any moment. The jury remains out but it does have some fairly influential proponents.

Away from all the hype, exit scams and market manipulation are some inventive and passionate people. They are leading in the development of blockchain technology that will potentially revolutionise the way we spend, borrow and interact in the future. From gaming to the metaverse, defi to layer 2 scaling solutions, I have learnt a huge amount on this journey.

The growth of crypto through 2021 spawned many new millionaires across the globe.

HMRC’s increasing focus

There will be big some gainers who have relocated to low tax jurisdictions such as Dubai. For those that haven’t, 2021/22 could have been the tax year where they turned £10,000 into £1,000,000 and HMRC will want their cut of this.

A recent Freedom of Information request shows that since 2016, HMRC has issued 177,000 nudge letters.  This is a small number, as the FCA estimate that the UK has 2.3m crypto investors. Only 13,000 of those were sent in 2021/22.

Nudge letters are likely to be based on information from Centralised Exchanges (CEXs) such as Coinbase. They are required to complete KYC for customers before they transact on their platforms.

HMRC is likely to be aware of the existence of individuals owning an exchange wallet. It’s unlikely they will have details of the transactions/numbers generated within those wallets.

Difficult tax calculations

HMRC is reliant on the taxpayer assessing their own gains, which is not straightforward.

The complexity largely arises out of HMRC seeking to apply the same set of capital gains tax pooling rules to crypto, as they do shares.

The difficulty comes with the sheer number of transactions you have to analyse to calculate net gains or losses. The software can be purchased to analyse gains and losses arising across all wallets but I believe that none of these reports incorporates UK tax rules.

For example, same-day and 30-day matching rules implemented to prevent ‘bed and breakfasting’ will not be taken into account. The ‘bed and breakfasting’ rules were introduced in 1998 to counter the sale and repurchase of shares so as to crystallise gains or losses (to use the annual exempt amount or offset against other gains).

Converting GBP into stable coins such as USDT, then into Ethereum, before selling and converting back to GBP, are all transactions potentially assessable to capital gains tax (CGT). This means the number of transactions in a year could be mind-blowing, especially when you can flip between tokens at a click of a button.

It would be extremely time-consuming to go through and pool all of these acquisitions and disposals. If the end result is a gain under £12,300 (the CGT annual exempt amount), it is a huge amount of work for no tax.

The alternatives

Unless HMRC develops a software partnership to implement compliant CGT reporting, there is likely to be an unprecedented number of errors on returns.

The alternative would be for HMRC to introduce bespoke legislation that recognises the difficulties faced in applying current legislation to crypto. Perhaps accepting an individual’s overall gain/loss position for the year without pooling (although that may not be practical because of the possibility of tax avoidance) could be a start.

Our dedicated cryptocurrency team is on hand to help clients understand the complex tax rules.

Our investors’ perspective provides a unique service. Our technical expertise includes calculating complex CGT and self-assessment.

If you would like to discuss how we can help you, please contact Paul Webster here.