Following a Freedom of Information request, HM Revenue & Customs is reported to be working alongside leading cryptocurrency exchange platforms in an attempt to gather personal information of users. It has taken this action with the sole purpose of prompting investors to be mindful of tax implications that can occur when dealing with cryptocurrency assets. As a result, investors can now expect to receive ‘nudge’ letters from HMRC, reminding them to pay their taxes correctly. 

William Je Founder of Himalaya Exchange comments: “It seems as though there is now a mounting pressure on investors. For UK tax purposes, crypto assets are usually subject to capital gains tax for individuals who hold them as personal investments on any profit realised.

“Investors also need to be aware that there are also instances if an individual is seen to be ‘trading’, ‘mining’ or as part of an employment remuneration package then any profit could be open to income tax. As with any asset if there has been no disposal of the cryptocurrencies there is not usually any tax due as you only pay taxes in the UK on realised profits.”

“A disposal for UK tax purposed may occur if Cryptocurrencies are sold for cash, used to buy other assets with a value or exchanged for another Cryptocurrency. By way of example if you have exchanged a token from one platform to another platform (i.e Bitcoin to Ethereum) this would be a disposal for UK capital gains tax purposes and a re-purchase at the market value at that date of the new token,” added Je.

Business owners also need to be aware that receiving a cryptocurrency in payment for goods or services sold by your business requires you to bring the value of the cryptocurrency into your sales/turnover and the same value forms the purchase cost of that cryptocurrency for a future sale of it.

There are some special rules which are referred to as ‘Bed and Breakfasting’ – which apply for selling and buying the same Cryptocurrency within 30 days. 

Je added: “We would argue that anyone investing in cryptocurrency needs to be careful when calculating the profits/losses arising from the disposal of Cryptocurrencies. HMRC receives information from crypto exchanges and will pursue those who fail to report their profits correctly. Penalties for failure to report gains can be quite severe.”

Investors may face some potentially difficult issues when it comes to reporting which is almost entirely based on the problems around calculating potential gains or losses:

• Cryptocurrencies are subject to major price volatility in the market, and this can result in significant gains or losses. Furthermore, individuals can very often undertake a large number of transactions each tax year which can prove difficult to keep records of accurately.
• In addition, cryptocurrency exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual comes to evaluate the position. Therefore, we advise that records start to be saved by investors as soon as possible. 
• UK tax rules also dictate that specific ordering rules apply to tokens purchased and sold within the same token across multiple wallets via a pooling method. For example, an individual may have multiple wallets across separate trading platforms and containing the same token (e.g. Bitcoin) would need to be calculated together to work out any potential profit/loss on disposals.
• Finally, the tokens need to be converted into GBP sterling (as most are priced in US dollars) at the time of each transaction (i.e. purchase or sale) and their market value needs to be ascertained.

Himalaya Exchange recommends that individuals must therefore keep a record of the following:

• the type of crypto asset
• date of the transaction
• if they were bought, sold or exchanged
• number of units involved
• value of the transaction in pound sterling (this is the market value in GBP at the date of the transaction)
• the cumulative total of the investment units held as well as the cumulative cost.
• bank statements and wallet address in case these are needed for an enquiry or review.

These are records that should also be kept and produced in an event of an enquiry. They form part of the audit trail from acquisition to disposal and therefore evidence of any gains/ losses made.