Syed Rahman and Ulrich Schmidt explain the obligations that have been introduced in a bid to tackle tax evasion.
As from today, new rules come into effect that aim to prevent tax evasion by those buying and selling cryptocurrency.
Under the Cryptoasset Reporting Framework (CARF), cryptocurrency exchanges must now collect information about the tax residency of their users and report it, along with other matters, to HM Revenue & Customs (HMRC).
Exchanges are now obliged to disclose to HMRC details about the identity and transaction history of their customers, as well as information about the profits that those transactions generated. This change could prove significant: HMRC has estimated there may be thousands of people who possess crypto that have not paid the tax they should have on it; including capital gains tax .
In the early 2010s, the requirements regarding paying taxes on gains made within the crypto sector were unclear. But the situation has been largely clarified by HMRC since then. HMRC first released guidance in 2018 clarifying that capital gains tax was payable on gains made from crypto assets. HMRC was clear – just because cryptoassets were a novelty to many, that did not exempt them from taxation. HMRC now believes the introduction of the new framework could lead to an average of an extra £60 million a year being raised in tax revenue over the next five years.
Taxable
With the last tax year seeing a significant increase in the value of some crypto assets, HMRC may not be overestimating the amount of tax owed by those trading in them. There may be many who bought and sold crypto at a profit during that time, and that profit is what HMRC views as taxable.
The HMRC self-assessment tax return form now has a section specifically for crypto. HMRC has also introduced a disclosure facility that enables those who have bought and sold cryptoassets, including tokens such as Bitcoin as well as NFTs, to disclose previously undeclared (and untaxed) gains made before April 2024. There are clear benefits and advantages to self-reporting – should HMRC identify a tax issue before self-disclosure takes place, then the penalty to be paid could be significantly higher.
The UK tax authority’s focus on the crypto sector should not come as a great surprise to anyone, considering that guidance regarding it has been steadily released over recent years. HMRC has believed for some time that non-payment of tax has been common among those investing in crypto. These new measures give it the ability to examine in detail the activities of those investors. The fact that the information it obtains as a result will be shared between countries is a further indicator of the increased scrutiny that the crypto sector finds itself coming under.
