The cryptocurrency sector has outpaced tax regulations with an anticipated annual growth rate of around 12 per cent, leading to a notable amount of tax evasion and underreported earnings.
Due to this, HM Revenue & Customs (HMRC) is spearheading a pioneering global initiative to clamp down on tax evasion and underreporting among cryptocurrency asset holders.
Understanding the workings of this campaign is vital for those holding digital currencies to ensure they are compliant with tax laws.
The Crypto-Asset Reporting Framework (CARF)
The CARF, a major new initiative in crypto tax transparency, is led by the UK under the auspices of the Organisation for Economic Co-operation and Development (OECD).
It requires crypto platforms, like Coinbase and Gemini, to disclose taxpayer data to HMRC and other European tax authorities – a practice not currently in place.
This lack of reporting has led to a significant risk of crypto asset holders paying less tax than due, whether intentionally or not.
The OECD estimates that tax non-compliance could involve between 55 and 95 per cent of all crypto asset holders. The Government aims to recover millions in unpaid taxes through this initiative.
Your crypto asset tax obligations
The tax treatment of cryptocurrencies, including Bitcoin and Ethereum, is increasingly important for investors and traders.
HMRC classifies cryptocurrency not as currency but as property, making it subject to Capital Gains Tax (CGT).
As a private investor, any profit made from selling, exchanging, spending, or gifting crypto assets is liable for CGT, irrespective of the asset’s location or trading platform.
If your crypto assets have appreciated in value since acquisition, you must pay CGT on the profit.
The CGT rate depends on your Income Tax band and ranges between 10 and 20 per cent. You must report crypto asset gains on your Self-Assessment tax return.
There’s an annual CGT allowance, and only gains exceeding this threshold are taxable. The current CGT exemption is £6,000, set to reduce to £3,000 from April 2024.
Maintaining detailed records of all crypto transactions, including dates, values, and transaction types, is essential for accurate tax reporting.
However, in certain scenarios, like mining or business-related crypto trading, profits might be subject to Income Tax instead of CGT, depending on the nature and frequency of your crypto activities.
Crypto assets can create a minefield of tax issues. It can be challenging to determine if you’ve incurred capital gains or taxable income, and what exactly needs reporting.
We offer expert guidance to help you remain tax compliant while maximising your investment benefits, ensuring you avoid hefty tax bills or penalties.
For detailed advice on your tax responsibilities as a crypto asset holder, please reach out to us today.
