In today’s digital age, cryptoassets have become increasingly popular as a form of investment. However, with their rise in popularity comes the need for individuals to ensure they are compliant with tax regulations. The UK government, through Her Majesty’s Revenue and Customs (HMRC), has launched a specific disclosure route for individuals with unreported taxes on cryptoassets to bring their affairs up to date. This blog post will explore the importance of unreported cryptoasset tax disclosure and how individuals can take the necessary steps to comply with tax obligations.
What is Unreported Cryptoasset Tax Disclosure?
Unreported cryptoasset tax disclosure refers to the process of individuals coming forward and correcting their tax affairs related to cryptoassets. HMRC has introduced a voluntary disclosure route that allows individuals to declare any undeclared capital gains tax (CGT) or income tax associated with cryptoassets. This initiative aims to ensure that individuals who hold cryptoassets are compliant with tax regulations and fulfill their tax obligations.
Why is Unreported Cryptoasset Tax Disclosure Important?
The increasing popularity of cryptoassets has caught the attention of HMRC, leading to targeted letters sent to individuals suspected of holding cryptoassets but failing to declare any income or gains. Failure to comply with tax obligations can result in penalties and legal consequences. By voluntarily disclosing unreported cryptoasset taxes, individuals can rectify their tax affairs and avoid potential penalties.
The Scope of Unreported Cryptoasset Tax Disclosure
HMRC expects that most individuals holding cryptoassets will fall within the scope of CGT. While some individuals may be actively trading in cryptoassets, HMRC sets a high bar for considering such activities as exceptional circumstances. In most cases, individuals hold cryptoassets as personal investments for capital appreciation or specific purchases. However, it is crucial to note that certain activities related to cryptoassets, such as selling them for fiat currency, exchanging them for other cryptoassets, gifting them, or using them for purchases, can create a disposal for CGT purposes.
The Financial Conduct Authority (FCA) estimates that a significant number of UK adults, approximately 4.97 million, hold cryptoassets. As the number of cryptoasset investors continues to grow, it is essential for individuals to ensure they are compliant with tax regulations.
How Far Back Should You Go?
Determining how far back individuals need to go to correct their tax affairs follows the usual rules set by HMRC. Individuals should look back four years if they have taken reasonable care, six years if reasonable care was not taken, and up to 20 years if there was a deliberate attempt to mislead HMRC or a failure to notify HMRC of new income or gains. It is worth noting that the launch of Bitcoin, the original cryptocurrency, on January 3, 2009, sets an upper limit of 14 years for cryptoasset disclosure.
Future Measures and Compliance
To enhance compliance, HMRC announced that from the 2024/25 tax returns onwards, cryptoasset disposals will need to be separately identified in the CGT pages. This measure will make it easier for HMRC to identify missed disclosures and take appropriate action. Additionally, from 2027, HMRC will start receiving transaction information from cryptoasset platforms under the Cryptoasset Reporting Framework (CARF). This framework, signed by 48 countries including the UK, aims to improve data exchange protocols and strengthen tax compliance.
Unreported cryptoasset tax disclosure is crucial for individuals who hold cryptoassets to ensure compliance with tax regulations. By voluntarily coming forward and correcting their tax affairs, individuals can avoid potential penalties and legal consequences. HMRC’s specific disclosure route provides a means for individuals to bring their affairs up to date and fulfill their tax obligations. As cryptoassets continue to gain popularity, it is essential for individuals to stay informed about tax regulations and take necessary actions to remain compliant. Contact DSW Tax Advisory today to learn more about how we can help you manage your cryptoassets.
