UK: UK Taxpayers: Time To Disclose Income And Gains On Cryptoassets

HMRC have launched a new disclosure facility for unpaid tax arising from cryptoasset transactions. The new purpose-built facility, which was launched in November 2023, allows individuals to disclose unreported income and gains arising specifically on cryptoassets, including exchange tokens and non-fungible token (NFTs).

The key benefits of making an unprompted disclosure include reduced penalties and the waiving of late payment interest charges. Although no specific benefits have been announced, as a general rule, HMRC treat individuals who voluntarily disclose historic tax liabilities more favourably than those who do not.

Where is a disclosure is made, HMRC should issue a payment reference and payment must be received within 30 days of submitting the disclosure, otherwise penalties may apply. Before making a payment, HMRC require the taxpayer to calculate their own unpaid tax liability. As the tax liabilities arising out of cryptoasset transactions are complex, we would recommend seeking tax advice from our experts before making use of the disclosure facility.

Taxation of Cryptoassets

The majority of cryptoasset-holders are unfamiliar with the tax implications of cryptoasset transactions. In fact, the Treasury estimates that tax non-compliance could be as widespread as 95% of all UK cryptoasset holders. This confusion largely stems from the lack of specific tax legislation on cryptoassets, which falls under the scope of pre-existing legislation, and HMRC's inconsistent approach to cryptoasset taxation.

HMRC guidance from 2014 suggested that they would accept highly speculative transactions as a form of gambling - which falls outside the UK income and capital gains tax regimes. Given the high volatility of crypto markets, many individuals took this to mean that speculative cryptoasset transactions would be classed as gambling from a tax perspective, but it is now clear that this is in fact not the case.

HMRC's 2021 cryptoasset manual states that the tax treatment of cryptoassets depends on their 'nature and use' by the taxpayer. Most individuals hold cryptoassets as a personal investment for capital appreciation, which falls under the Capital Gains Tax ('CGT') regime. Such individuals will need to pay CGT of up to 20% on the disposal of cryptoassets, subject to their tax rate and the availability of their annual allowance (a tax free allowance on capital gains currently at £6,000 for the 2023-24 UK tax year, and falling to £3,000 from 6 April 2024). A CGT liability may also be triggered by exchanging one form of cryptoasset (eg Bitcoin) for another (eg Ethereum), even if the individual does not transfer either holding into cash.

Outside the CGT rules, individuals who receive cryptoassets from their employer as a form of non-cash payment may be subject to Income Tax. Similarly, cryptoassets generated from mining or staking may be taxed as income. Broadly speaking, rates of Income Tax exceed the rates of CGT, with a top band of 45% on non-savings income for additional rate taxpayers.

A small fraction of the market, who regularly buy and sell cryptoassets, could be classed as 'crypto-traders' and will also be subject to Income Tax. Where HMRC are satisfied that there is a high frequency of cryptoasset transactions carried out within a sophisticated and organised operation, the Income Tax rules will take precedence over the CGT rules, often imposing a heavier tax burden.

Further complexities can arise in determining the situs and base value of a pool of cryptoassets, particularly for those claiming the remittance basis in the UK, therefore it is important to seek expert legal advice to ensure that you are tax compliant on your crypto-holdings.

Tightening Regulations

The new disclosure facility follows a trend of tightening cryptoasset regulation worldwide which will result in an increased pool of information for HMRC to draw on in investigating unpaid tax on historic cryptoasset transactions.

On 17 October 2023, the Council of the European Union extended the scope of the Directive on Administrative Co-operation ('DAC') to the exchange of crypto-asset information between EU member states for tax purposes. This forms the eighth amendment since DAC was first introduced, and so is referred to as 'DAC-8'.

Prior to DAC-8, EU tax authorities lacked the means to exchange information on cryptoasset transactions; this was exploited by individuals for tax evasion and fraud, especially in cross-border transactions which cryptocurrencies tend to facilitate. DAC-8 has introduced a requirement for crypto-asset service providers to report transactions on an annual basis and facilitates the transfer of information between the tax authorities of member states.

Shortly after the introduction of DAC-8, the UK along with 47 other countries formally adopted the OECD's Cryptoasset Reporting Framework ('CARF') on 10 November 2023. The new regime will be implemented in 2027, requiring cryptoasset platforms to share taxpayer information with tax authorities in endorsing jurisdictions. HMRC intends to make use of this information to monitor the historic reporting of cryptoasset transactions and carry out compliance checks to determine whether individuals have correctly reported and paid tax on cryptoasset-related income and gains.

With the upcoming introduction of CARF and DAC-8, now appears to be a critical moment for individuals to review and settle any unpaid income or capital gains tax liabilities arising out of cryptoassets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.