There are press reports that HMRC has written to the main cryptocurrency exchanges including Coinbase and Etoro, asking for details of transactions by UK residents (the Daily Telegraph quotes a report on Coindesk).
HMRC has been active in collecting data and using this to challenge tax returns, including by the use of “nudge” letters. These are letters where HMRC indicates that they have information that an individual’s returns may not be complete, and ask them to tick a box to either confirm that they will now regularise their affairs by making a formal disclosure, or to make a declaration that all tax has been paid. HMRC have confirmed that they intend to follow up those who don’t reply to such letters.
Where an individual has made gains on cryptocurrency in the tax year to 5th April 2018, HMRC are able to make enquiries into the return up to the end of the “enquiry window”, which is 31st January 2020 at the latest. Bitcoin prices rose very sharply in late 2017, and so individuals who realised those gains could well receive a formal enquiry into their return. This would particularly be the case if they don’t reply to a nudge letter. An individual is able to make an online correction to their return for this year up until 31st January 2020. An individual who made a gain but didn’t receive a return has already missed the statutory deadline to inform HMRC (5th October 2018).
HMRC’s guidance sets out the position on the taxation of cryptocurrency; unless the individual reaches the high threshold of activity and organisation to be a trader, their profits would be taxable to capital gains tax at 20%. This assumes that the gain exceeds the annual exempt amount for the year, eg £11,300 for 2017/8.
The key point to note here though is that HMRC consider that there is a taxable disposal when an amount of cryptocurrency is converted into another currency or a token, not just when the cryptocurrency is converted into a “fiat” currency such as sterling. This means that the calculation of cryptocurrency gains is likely to be very complex, requiring the market value at the date of any exchanges made.
We have been able to undertake simpler calculations for clients in particular circumstances by showing that their overall gain in a tax year must be equal to the gain in sterling. In general, though, individuals would need to consider whether they have all the information to be able to compute the gains themselves, as it is likely to be expensive for a tax professional to do the detailed calculations.
Individuals who have realised a taxable gain in 2017/8 may have suffered a capital loss in an earlier tax year which they have not claimed. They are still within the time limits to make claims for losses in the tax years from 2015/6, which can then be offset against the taxable capital gain. It should be noted though that a capital loss in 2018/9 can’t be carried back to 2017/8.
Where tax is due, then HMRC will charge interest on late paid tax and may also seek penalties. Such penalties can be mitigated by putting things right before HMRC identify errors or omissions from a taxpayer’s return. If there is tax due for a tax year earlier than 2016/7, and if it is within the definition of “offshore matter” or “offshore transfer”, the penalty rates can be up to 200%.
For an individual who made cryptocurrency gains in the tax year to 5th April 2018, there are some key questions to consider.
a) Did I realise gains on a cryptocurrency in the year to 5th April 2018, even if this was still invested in another cryptocurrency?
b) Do I have the information to calculate the gains and do I understand how to do the calculation?
c) Can I amend my tax return for 2017/8 to pay tax due?
d) If tax is due for earlier years, how can I deal with this?
e) Do I want to calculate capital losses?
f) Do I want to wait for a nudge letter or do I want to sort this out now to minimise interest and, hopefully, penalties?
g) Is the amount at stake large enough for me to need professional tax advice?
Trident Tax would be happy to assist.