Cryptocurrency- From Anonymity to Accountability

Did you know that HMRC (HM Revenue & Customs) have the power to request data from cryptoasset exchanges?  Many are still largely unaware that this power has been in place for years and indeed HMRC have already used it to their advantage, obtaining details of individuals’ entire trading history and value of assets held. 

Cryptoasset exchange Coinbase, has confirmed that information is being shared with HMRC, but in this case, they have agreed it would only reflect those who have cashed out over £5,000 in currency from the service. 

While this is just one example of HMRC requesting data from an exchange, it’s safe to say that both exchanges and crypto investors should get ready for existing income or value thresholds to either be changed, reduced, or even removed in the future. The expectation being that HMRC will soon be able to insist on far more information being provided to them. 

HMRC Nudge Letters  

HMRC have already been using this ‘insider knowledge’, ie checking the exchange data received against Tax Returns submitted by those same individuals. Where they find a distinct misalignment between details received from the crypto exchange and the Tax Return entries made, they have been issuing ‘nudge’ letters to these same individuals, reminding them of their obligation to report any income or capital gains which have arisen due to crypto-related activities. In effect, prompting them to revisit their previously submitted Tax Returns to correct any entries if needed.  Nudge letters have also been issued to those who do not already file a Tax Return, attempting to again persuade those involved to rethink their reporting obligations.  

The impact of not reporting or not addressing incorrect tax returns can be severe and any such letter should be addressed as soon as possible, alongside appropriate professional advice.  

Visibility and Reducing Perceived Risks to Investors – What’s next? 

The UK government are not done yet. Following the failures of well-known crypto exchanges and organisations such as FTX – a recent proposal has just concluded its’ consultation stage and outlines additional regulations for crypto exchanges and businesses, tightening their data reporting policies and Anti-Money Laundering / Know-Your-Client checks.  

While the proposal covers a broad range of cryptoasset activities, such as the operation of a crypto trading venue and the custody of various cryptocurrencies in an exchange, it can be summarised by closely looking at what the proposal is aiming to achieve – a market held to a standard more closely representing that of other financial services products with similar risk profiles. 

Examples of this new standard could include information sharing between trading venues and surveillance of orders undertaken on an exchange, in addition to other measures used to prevent and detect general market abuse. 

The proposal outlines the possibility of the Financial Conduct Authority imposing capital and liquidity thresholds for exchanges in a bid to reduce the possibility of future exchange failures, in addition to arrangements restricting the comingling of investors’ assets and business assets to minimise the risk of loss to investors should a custodian become insolvent. 

Who will this impact? 

We’ve already established that HMRC can request data from crypto exchanges and, as noted by the Revenue, most exchanges have been happy to oblige to date.1 Thus, don’t be surprised if a letter comes to the door when you hold or dispose of cryptoassets – serving as a reminder of your duty to fulfil reporting obligations on any disposals and income incurred during the tax year. The latest guidance from HMRC, states that most cryptocurrency transactions will fall under Income Tax or Capital Gains Tax legislation now, with most tax authorities worldwide following a similar ruleset. 

Fortunately, the latest proposal looks to protect customers by imposing tougher rules on how cryptoasset information is shared in the wider crypto market by businesses and exchanges and improving Anti-Money Laundering / Know Your Client checks to help ensure users of these exchanges are legitimate and, where they are not, are barred from utilising those services. 

So, whilst HMRC already have the power to obtain information from crypto exchanges on their users, the future could lead to the same style of tight-knit rules and regulations which could be found within the Traditional Finance sector being imposed upon the cryptocurrency market, their exchanges, and businesses in the UK and beyond.  

Many would say that these same financial regulations are the very reason why Crypto has, up to this point, been so attractive to many investors. It looks certain that these new proposals will lead to the removal of the most attractive aspects of cryptoassets for investors; security, speed and most importantly, confidentiality. 

If you would like further information on how we can assist with your crypto tax affairs while staying firmly on the right side with HMRC, please do not hesitate to contact your Lynn Gracie, Jake Thain or your usual AAB contact.