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Crypto record keeping and HMRC enquiries

Posted on 12 Dec 2022, by InTAX Ltd

Crypto record keeping and HMRC enquiries

Crypto assets are here to stay, but as the ‘new kid on the block’ in contrast to more traditional options, they can cause uncertainty around the area of tax implications.

This is the sixth in a series of short articles that explore the emerging world of crypto assets, focusing specifically on the records that are created by crypto transactions and how HMRC may intend to obtain and use them.

It is the responsibility of the taxpayer to maintain sufficient records to support a tax return each year. It is no surprise then that this responsibility extends to maintaining records of all crypto transactions.

Crypto exchanges such as Coinbase will keep a record of your transactions; however, this should not be relied on as the sole record keeping for your tax affairs. There is no guarantee that a crypto exchange will keep your records for as long as is required to support a tax return or, as widely published in the case of FTX, it is not certain that the exchange will still even exist in the future. Therefore, it is recommended that users of crypto exchanges take regular downloads of their transactions and balances where possible.

If you are paying for expenses using crypto, or selling goods taking crypto as payment, or paying staff, you will also need to keep a record. For all transactions, the ‘fiat’, or pound currency value, should be recorded at the time of each transaction, as it is this value that is potentially taxable.

If you have entered into transactions with centralised crypto exchanges in the past couple of years, you will probably have been prompted to provide Know Your Customer (KYC) identification information. This personal information connects transactions with the taxpayers who make them. The crypto exchange therefore holds all the information which can be used to calculate the gains and losses of individuals or companies using its exchange to trade, in a similar way to a stocks and shares trading platform. It is no surprise that this is the information HMRC is particularly interested in to check the position of its taxpayers.

Although to date the information that has been shared by crypto exchanges is limited, HMRC has still been able to use it to issue nudge letters to the individuals it believes may need to consider their tax position in relation to crypto. This is the first step in HMRC increasing compliance activity where crypto is concerned and it is only a matter of time before HMRC will be able to obtain more of the information these crypto exchanges hold.

Further, where value in the crypto world translates into the physical work (for example buying a property or a significant asset) HMRC will often see some record of that transaction and ask where the money came from. The concept of crypto being completely anonymous is a misnomer, there are an increasing number of ways that HMRC can gain visibility.

HMRC has numerous powers enabling it to obtain information, check and correct the tax returns of taxpayers. Information powers allow HMRC to issue formal notices for information that is either statutory, or reasonably required, to check the accuracy of a tax return. These notices can be made either to the taxpayer as a first party, or to a third party it believes has the information within its power and possession. It is inevitable that HMRC will eventually seek to utilise these powers to obtain information from taxpayers and exchanges relating to crypto activity. Not declaring crypto income and gains because ‘HMRC won’t find out’ is neither true, nor a good idea.

Discovery powers allow HMRC to correct earlier tax returns where it discovers that there has been an inaccuracy in that return. The normal time limit for HMRC to utilise discovery powers is four years from the end of the relevant tax year, however this is extended to six, or even 20 years where HMRC can evidence the inaccuracy was a result of careless or deliberate behaviour respectively. This means that any crypto activity which may have led to an underassessment of tax in a return in years gone by could fall within HMRC’s scope of power to discover.

In summary, we highly recommend that you keep your own records of your transactions including the ‘fiat’ currency value at the time of all transactions. Income and gains should be properly declared, and losses claimed if necessary. Crypto transactions are unlikely to remain anonymous and HMRC has the power to assess where omissions are made.

In our next article we’ll look at how past errors or omissions can be rectified and declared to HMRC.

If you have any questions about tax on crypto assets, or tax issues in general please get in touch on 0203 675 8122 or email Jeremy at jeremy.johnson@intaxltd.com.