Investing in cryptoassets

Investing in cryptoassets can be volatile – don’t let HMRC penalties take part of your profit, or increase your losses.

Over the last year we have spoken to a lot of people who have tried investing in cryptocurrencies for the first time and in particular when the value of leading currencies surged in the Spring of 2021. Since then values have fallen away sharply, but have started to rise again.

If you have invested, you may have made significant gains or incurred losses, but do you know how to go about reporting these to HMRC? And do you know that failing to report them could leave you open to penalties from HMRC?

Reporting cryptoasset transactions to HMRC

In April we published a blog on the tax treatment of cryptoasset transactions. As a recap, any disposal for tax purposes can be defined as:

  • Selling
  • Exchanging
  • Using cryptoassets to pay for goods or services
  • Give away

It is important to understand that even though you may assume you have not made a gain, perhaps you exchanged cryptoassets and did not receive any actual proceeds paid out, you have made a transaction for tax purposes and the tax consequences need to be considered. Therefore, if you have made even a single transaction we would recommend you obtain professional advice to ensure you declare this to HMRC if required.

How do I report transactions to HMRC?

If you meet the requirement to complete a self-assessment tax return you will need to report the transactions on a return. You must declare the transaction on a return if:

  • You are already in the self-assessment system and file returns
  • Your sale proceeds are greater than £49,200 or the actual capital gain is more than £12,300

If you have not previously filed a tax return you must inform HMRC of your need to do so by 5 October following the tax year your transaction occurred in. Therefore if you sold, exchanged, used crypto to pay for goods or services or gave away any assets in the 2020/21 tax year (6 April 2020 to 5 April 2021) you must inform HMRC by 5 October 2021. Self-assessment tax returns need to be filed online by 31 January following the end of the tax year, or by 31 October if filing by paper.

How much tax will I have to pay?

Capital Gain Tax (CGT) rates depend on your other income in the year and will either be 10% or 20%, or a mixture of both. Every individual has a CGT annual exemption, currently £12,300, meaning they can make a gain up to that amount before paying any CGT.

There may be cases, although exceptional, when HMRC deem an individual to have a ‘trade’, income tax would instead be charged on the gains. Income tax rates are 20%. 40% and 45%.

If you have incurred losses on cryptoassets – these may be “capital” losses and unfortunately it is possible to have circumstances where a capital loss is incurred in a tax year where it cannot be offset against other income or prior capital gains. So, unfortunately, you cant assume that losses can be offset for tax purposes.

How will HMRC know I have made cryptoasset transactions?

HMRC can make information requests from exchanges to obtain information of investors and their investments.

As cryptoassets evolve, HMRC will also evolve the investigations and a big step in this process was in March 2021 when HMRC released updated guidance on the taxation of cryptoassets, putting an end to uncertainty on how assets are to be taxed.

It would be extremely sensible to ensure you are aware of your assets, transactions and your tax compliance obligations to ensure you are fully compliant. It is important to know that you are responsible for keeping records showing your transactions as often the cryptoasset exchanges only keep records for a short period of time.

What penalties can HMRC impose if I don’t report the transactions correctly?

As you would expect, it is important that gains are reported correctly to HMRC (including details of the values, the history and the period in which the gains occurred).

If your tax is underdeclared because you have not correctly included gains, HMRC can recover both the underdeclared tax but can also impose penalties which are based on the tax underdeclared.

HMRC will typically seek to impose penalties where a taxpayer has either been careless in not including the information, or higher penalties where HMRC suspect the tax payer deliberately didn’t include the information.

How can we help?

We can advise on the tax considerations of a cryptoasset transaction as well as what your compliance obligations are.

If you have any queries please do not hesitate to contact us at advice@taitwalker.co.uk.