Correcting crypto mistakes and learning for the future

Crypto is in the crosshairs. As the FT recently reported, HMRC has been cracking down on cryptocurrency investors, recovering over £8 million in settlements in the last three years – more than half of it in the last tax year.

Those numbers are going to grow as regulation increases the transparency of the sector, bringing reporting by crypto businesses more into line with mainstream financial services. Gains or income that may previously have gone unnoticed, and unreported, will be much more likely to come to light.

Those who hold crypto or have invested in the past may need to review previous returns and plan afresh for the future.

In most cases, this is more likely to be a question of errors, rather than avoidance. The crypto industry is still young, and it remains a relatively new asset class for many investors. Misunderstandings are inevitable.

Cryptocurrency is, after all, famously not a currency as far as HMRC is concerned, but property. Taxable events, meanwhile, have not always been recognised, as such, by those holding crypto assets:

• Cashing in crypto or switching between cryptocurrencies, trading Bitcoin to Ethereum, for instance, may create a capital gain

• Similarly, spending it on goods or services is also a reportable disposal. Buying a pizza or coffee may be a taxable event

Moreover, the decrease in capital gains tax allowances from £12,300 in 2022 to £3,000 in the current tax year has dragged even smaller investors into its scope. For these reasons, it’s not surprising some have innocently failed to report gains properly.

Unwitting or otherwise, however, individuals need to set this right. And there’s probably a narrowing window in which to do so without suffering serious consequences.

Despite HMRC’s crackdown on undeclared crypto gains, and its early clarity about how the assets should be accounted for, it has not been oblivious to the scope for confusion and mistakes. Voluntary disclosures of past failures to report gains generally have a good prospect of a sympathetic hearing.

Its patience is unlikely to endure once improved reporting from crypto exchanges, platforms and marketplaces enhance its ability to identify undeclared income and capital gains proactively. Investors probably have 12 months or less in which to come forward with past gains and limit any penalties.

It may not always be simple, however.

A corollary of past poor levels of reporting and the unregulated nature of the market is the frequent difficulty in identifying events linked with specific tokens. Crypto exchanges and platforms have often lacked the reports and visibility provided by traditional brokers and asset managers that support their customers in putting together tax returns.

Solutions do exist, though. S&W, for instance, works with crypto tax software service firm Recap, which tracks crypto token transactions and produces reports to support tax compliance.

Putting history right is just a start, though. The increased scrutiny on crypto gains and improved transparency in the industry is an opportunity for those investing to review their position.

One of the benefits of the regulation is that crypto platforms and providers are likely to improve visibility for customers as well as regulators, offering reports and tools similar to other financial services providers. That should make returns easier to put together and compliance simpler.

But investors can also take this time and take advice and review their tax position, their exposure to crypto, and how that fits in with their wider wealth. It’s also a good opportunity to consider how it might be impacted by any tax changes we see in the Budget, such as suggestions of equalising capital gains and income tax rates, for example.

As the crypto market and regulation matures, it may be time to take a serious look at how it fits in with your tax planning and estate planning. Expert knowledge on these issues is a currency that pays.

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