Lack of crypto tax understanding a ‘concern’ for HMRC

Lack of crypto tax understanding a ‘concern’ for HMRC
(Gabby Jones/Bloomberg)

The tax rules for crypto need to be simplified if the UK is going to be a hub for the technology, a tax expert has warned.

Chris Etherington, a tax partner at RSM, was responding to data from HM Revenue & Customs which showed that 58 per cent of crypto asset holders do not know the tax implications of trading in crypto.

He said the lack of understanding will be a concern for the Treasury and HMRC, given the rise in popularity of crypto.

“HMRC are working to improve their guidance but as it stands, the lack of any specific legislation for crypto assets makes the tax rules impenetrable for many,” he said, adding that while financial investors in stocks and shares can benefit from ISAs, no such “safe harbour” exists for crypto asset holders.

“If the chancellor wants to truly make the UK a global hub for crypto assets technology then the tax rules in this space need to be simplified.”

Another cause of concern is the 76 per cent of crypto asset owners who are under the age of 45, Etherington said.

“The explosion of interest in this space could lead to many young people’s first real interactions with HMRC being an investigation into their affairs for unpaid tax in the future.”

Kantar UK, on behalf of HMRC, questioned 459 crypto asset owners in the first half of 2021.

Just 42 per cent of crypto owners were aware that they might be liable to pay tax, according to the research, with 45 per cent correctly identifying the potential of capital gains tax.

Only 16 per cent of owners had sought tax advice for their crypto assets, and 28 per cent had seen HMRC’s guidance on how crypto asset owners are taxed.

Warning shot across the bow

When the tax authorities commission a report into the behaviour of crypto holders, you can bet there is an ulterior motive at work, said head of investment analysis at AJ Bell, Laith Khalaf.

“[The research is] a warning shot across the bows of anyone who has made large crypto profits,” he said.

Just over half (52 per cent) of current crypto owners had holdings of up to £1,000, with 7 per cent owning more than £5,000 in value, the research showed.

“The small amounts of crypto held by most investors, combined with the annual capital gains tax allowance of £12,300, mean that for the vast majority, CGT is an academic issue,” Khalaf said.

“But crypto investors are at risk if they have large holdings, profits from frequent trading, or other assets generating capital gains. 

“This is particularly the case if they encashed last year before the crypto price falls we have seen in the last six months.”

Central bank warning

The warning comes days after the Bank of England highlighted the volatility of crypto assets.

In its bi-annual Financial Stability report, released this week (July 5), the UK’s central bank said a number of vulnerabilities were exposed within crypto asset markets similar to those exposed by past episodes of instability in more traditional parts of the financial system.