UK tax authorities publish reporting rules for crypto assets

  • By Tom Cleveland

  • January 8, 2019
  • 2:32 am BST

Since confusion reigns in nearly every government agency office when attempting to apply current legislative principles to digital assets, it comes as no surprise that global taxing authorities have also been wrangling their hands over what constitutes a sale or transfer, how to measure resulting gains and losses, and, ultimately, what rates of tax apply in a variety of situations. After a lengthy consultation period, the United Kingdom tax collection service finally published a set of rules for taxpayers to follow regarding any digital asset transactions encountered during the current taxation period.

Her Majesty’s Revenue & Custom service (HMRC) entitled its recently released position paper as “Cryptoassets for individuals”. Details are provided to assist private investors in determining their tax obligations resulting from a buy, sale, payment in, or even a loss of cryptocurrency. UK taxpayers have been waiting for months for clarification of the rules, and, at least for now, the HMRC endorses the process laid out within its paper.

Within the introductory paragraphs, the HMRC writes: “The tax treatment of cryptoassets continues to develop due to the evolving nature of the underlying technology and the areas in which cryptoassets are used. As such, HMRC will look at the facts of each case and apply the relevant tax provisions according to what has actually taken place (rather than by reference to terminology). Our views may evolve further as the sector develops.”

For now, nothing in the paper applies to businesses. Guidance for businesses will come later. The paper does define specific situations where either Capital Gains Tax (CGT) or Income Tax (IT) will be assessed, depending upon the type of transaction. In those unique situations where you may be paid for your services in cryptocurrency, you must still pay directly National Insurance taxes to cover obligations for social security.

One peculiar area of the new rules relates to what happens if your crypto wallet is hacked and you incur a loss. The HMRC is insensitive at this point, since it contends that the victim “still owns the assets and has a right to recover them. Those who do not receive cryptoassets they pay for may not be able to claim a capital loss. Those who pay for and receive cryptoassets, may be able to make a negligible value claim to HMRC if they turn out to be worthless.” More guidance on when “ownership” ends is needed.

It is a good thing that the HMRC has published its preliminary thinking in a paper. In far too many global jurisdictions, there have already been horror stories, where individuals reaped huge gains, only to reinvest them in enterprises that subsequently failed in a different tax period. The issue is that taxes may be due in a former period, when offsetting losses occur in another. The taxpayer may then be subject to huge fines and penalties, unless he can find a tax professional that can argue his case successfully before the authorities in his domestic jurisdiction.

The lesson is a simple one. Before investing in cryptoassets, be sure to check with a local tax professional to determine how gains and losses are to be reported and what, if any, taxes might apply to your potential handling of open positions down the road.