Pressure Is Mounting for Crypto Investors Due to Tightening Regulations
Prince Charles was earlier this week was expected to announce plans for a bill tightening regulations on cryptocurrency investors in the State Opening of the UK Parliament.
In anticipation of this, William Je, one of the most successful businessmen from Hong Kong and Founder of Himalaya Exchange, offered some thoughts on how crypto investors can ensure they comply with any future crypto-tax requirements in the UK.
Her Majesty's Revenue & Customs is reported to be working alongside leading cryptocurrency exchange platforms to gather personal information of users, following a Freedom of Information request.
The tax, payments and customs authority has taken this action with the sole purpose of prompting investors to be mindful of tax implications that can occur when dealing with cryptocurrency assets. As a result, investors can now expect to receive ‘nudge’ letters from HMRC, reminding them to pay their taxes correctly.
Penalties for failing to report gains can be quite severe, so investors should know how best to document transactions and avoid problems when calculating potential gains or losses.
Mounting pressure on crypto investors
William Je, Founder of Himalaya Exchange.
“It seems as though there is now a mounting pressure on investors,” said Je, Founder of Himalaya Exchange. “For UK tax purposes, crypto assets are usually subject to capital gains tax for individuals who hold them as personal investments on any profit realized.
Investors also need to be aware that there are also instances where if an individual is seen to be ‘trading’, ‘mining,’ or as part of an employment remuneration package, then any profit could be open to income tax. As with any asset, if there has been no disposal of the cryptocurrencies, there is not usually any tax due as you only pay taxes on realized profits.
“A disposal for UK tax purposed may occur if Cryptocurrencies are sold for cash, used to buy other assets with a value, or exchanged for another Cryptocurrency,” added Je. “By way of example if you have exchanged a token from one platform to another platform (i.e Bitcoin to Ethereum), this would be a disposal for UK capital gains tax purposes and a re-purchase at the market value at that date of the new token.”
Business owners also need to be aware that receiving a cryptocurrency in payment for goods or services sold by your business requires you to bring the value of the cryptocurrency into your sales/turnover and the same value forms the purchase cost of that cryptocurrency for a future sale of it.
There are some special rules which are referred to as ‘Bed and Breakfasting’ - which apply for selling and buying the same Cryptocurrency within 30 days.
“We would argue that anyone investing in cryptocurrency needs to be careful when calculating the profits/losses arising from the disposal of Cryptocurrencies,” Je said. “HMRC receives information from crypto exchanges and will pursue those who fail to report their profits correctly. Penalties for failure to report gains can be quite severe.”
Penalties for failure to report cryptocurrency gains
Investors may face some potentially difficult issues when it comes to reporting, which is almost entirely based on the problems around calculating potential gains or losses:
- Cryptocurrencies are subject to major price volatility in the market, and this can result in significant gains or losses. Furthermore, individuals can very often undertake a large number of transactions each tax year which can prove difficult to keep records of accurately.
- In addition, cryptocurrency exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual comes to evaluate the position. Therefore, we advise that records start to be saved by investors as soon as possible.
- UK tax rules also dictate that specific ordering rules apply to tokens purchased and sold within the same token across multiple wallets via a pooling method. For example, an individual may have multiple wallets across separate trading platforms and containing the same token (e.g. Bitcoin) would need to be calculated together to work out any potential profit/loss on disposals.
- Finally, the tokens need to be converted into GBP sterling (as most are priced in US dollars) at the time of each transaction (i.e. purchase or sale) and their market value needs to be ascertained.
Himalaya Exchange, a global fund manager with multi-billion assets under management, recommends that individuals must therefore keep a record of the following:
- The type of crypto asset
- Date of the transaction
- If they were bought, sold, or exchanged
- Number of units involved
- Value of the transaction in pound sterling (this is the market value in GBP at the date of the transaction)
- Cumulative total of the investment units held as well as the cumulative cost.
- Bank statements and wallet address in case these are needed for an enquiry or review.
These are records that should also be kept and produced in an event of an enquiry. They form part of the audit trail from acquisition to disposal and, therefore, evidence of any gains/ losses made.