You’d be foolish to think you’ll escape crypto asset taxation unless you were a very earlier adopter that was set up in a foreign place.
But the reality is that you’re not, are you?
Instead, you’re shuffling about with a new worry in your mind.
Is there any escaping Crypto Asset taxation? No. Increasingly, there are global initiatives on a number of taxing issues (pardon the pun).
A joined up approach has been taken to help stem the heavy losses to taxation coffers by making corporates pay a minimum 15% regardless of where income is derived.
And on a much smaller scale, soon to be introduced reporting compliance means transactions of $600 must be reported to the IRS. This casts a ‘net’ far and wide in terms of collecting tax from those working ‘under the table’ hosting a ‘hustle’ or sliding a ‘sideline’ for cash generation.
Expect ‘blighty’ (the UK) to follow suit swiftly.
Every which way you turn the doors are closing on tax avoidance, loopholes and general dodging (apart from the very high end) and crypto trading or investing is no different.
Yes, there are a few (that were well ahead of the game) and bought citizenships to far flung (mainly sunny places) but the harsh reality for most crypto investors/punters is that they’re tax residency is firmly (indisputably within the shores and jurisdiction) of blighty (that’s the UK to non patriots).
And the taxation tentacles of the US administration has greater tentacles than the most communist of regimes.
In this post some questions are answered that burn as brightly as a crypto miner cranking their crypto printing device to produce more coins.
Why is Puerto Rico attractive to Cryptocurrency investors?
In 2021 this tiny island which is a US territory passed two laws translating into ultra-low rates of taxation. Those without US assets and ties can sit on nice yachts punting and trading in the safe knowledge that their profits are theirs.
How much is capital gains tax in the US on cryptocurrencies?
As high as 37% which makes any other place with lower taxation rates attractive.
Is Puerto Rico better than other low tax places such as United Arab Emirates?
This depends on the type of lifestyle you want. Puerto Rico is a Caribbean Island and closer to the US. It has lush beaches and interesting landscapes so when you’re done with your crypto woes you have somewhere to sip a Pina Colada and think about bikinis (or thongs). In contrast whilst the UAE is high tech it can be sterile in comparison and being harsh laws. On the plus side is the infrastructure and ease of travel to other destinations is a big pull.
How does Her Majesty’s Revenue and Customs (HMRC) view Crypto?
As a type of property just like gold or a painting. For HMRC purposes it’s property and it doesn’t matter if the laws are outdated with definitions. It’s property, you bought it, made profit so deduct what you can, offset what you can and pay up.
What UK taxes apply to Crypto assets?
Capital gains tax (and possibly income tax). There’s a yearly allowance of £12,300 (£6,150 for trusts) for capital gains tax purposes but any gains above this are taxable at a rates of 10% or 20% you’re a basic rate taxpayer or 20% if you’re higher/additional rate taxpayer. Using a spouses (or Civil Partners) allowance is possible to potentially increase your tax free amount to £24,600. Income tax may also apply but this depends on the frequency of transactions (more below).
Why is Taxation of Crypto assets so important?
There are many creative ways in which cryptoassets have evolved and continue to evolve. If a state loses control of ‘money’ which is why ‘decentralization’ is such a threat then the state also loses tax revenues it can collect. Imagine for a moment if you could set up a cryptoasset account and not pay any tax – that would be great for you – but not for the state.
Or to think of it a different way.
In both the US and the UK public sector/federal pensions cost billions and billions (possibly trillions).
IF taxation isn’t collected who will pay the very generous pensions that the police, judiciary, health workers and teachers have the right to?
Does the UK have any Crypto laws on the Taxation of crypto assets?
No. HMRC has guidance in place but due to subjective views on jurisdiction, decentralization of the asset class and the true ‘home’ of the assets and their owners it’s a highly contested subject.
Shakespeare struggled with defining love and for many it’s still a mystery.
The cryptosphere poses a similar type of problem. If love is ever defined so will crypto.
What is a Joe Doe Summons?
In the US the IRS issued legal summonses (when a person’s name is unknown) to crypto exchanges Kraken, Poloniex and Coinbase. In turn these crypto exchanges had to collate and pass on all data.
The outcome was that the IRS was able to cross reference transactions and reported gains and also identify account holders that had made no declarations to the IRS.
Another additional win for the IRS is that a strong message is sent that acts as a deterrent to not disclosing crypto asset gains.
Of course, this exercise also yielded some false IDs with funds funneled to bogus offshore accounts.
What is Operation Hidden Treasure
The is the analysis of Blockchain to fight tax evasion. Blockchain is the technology used to power cryptocurrencies and the IRS has a specialist team (headed by Jack Sparrow) performing analysis.
Do Crypto Brokers have to report Crypto gains to the IRS?
Currently no. But once the US Infrastructure bill crypto brokers will have to report crypto asset gains to the IRS. There may be discussions around definitions of brokers but the spotlight is on them. If you think this is invasive – it is. But when you think that all financial institutions will be reporting any transactions of $600 or more – you see the future shape of things to come.
What is the UK’s HMRC doing to combat Cryptoasset tax evasion?
HMRC requests data from exchanges Coinbase, Etoro and CEX.IO. Oh, so that’s why Etoro stopped taking new accounts!
Can HMRC detect information across borders?
It’s been a common misconception that crypto investors can avoid HMRC scrutiny by holding, transacting and generally cashing in abroad.
This is both naive and misleading. HMRC can make information requests from crypto exchanges under certain statutory powers, so why wouldn’t they?
- HMRC has used powers provided by parliament to gather information from entities about their customers’ transactions in, and holdings of, cryptoassets;
- HMRC has exercised rights under International Treaties to request information from other tax administrations to obtain information held by cryptoasset exchanges and data holders outside the UK;
- HMRC also received data derived from crypto asset exchanges about their users as part of spontaneous exchanges of information from other tax administrators;
- HMRC is gathering personal data in the form of names and addresses;
- HMRC is gathering data from exchanges about customers who are both one-time and recurring customers;
- HMRC is gathering information about frequency of transactions/trades;
- HMRC is gathering information about the value of cryptoassets belonging to clients;
- HMRC has requested bulk data from 2017/18 to 2019/20;
- HMRC has received information on name, address and values of cryptoassets belonging to their clients;
- HMRC has received information from exchanges for 2017/18 to 2019/20 inclusive.
Are Foreign exchange holdings liable for CGT?
If it is for personal expenditure outside of the UK, then no for a clue.
What does Jurisdiction mean anyway?
In the UK the location of the owner of cryptoassets is important for taxation. Younger crypto investors with little in the way of property or other assets in the UK can quite easily change their location and residency for tax purposes. In contrast, those firmly tied to the UK have a much harder time.
Should You come forward with Cryptoasset gains?
It’s never a good idea to purposely avoid paying tax. As such gains should be declared rather than waiting for HMRC to know at your door after obtaining your information from a third party. We live a technologically advanced state of ‘Government Gateways’ and most communications are monitored (with or without consent).
As such, it’s very stupid to believe that HMRC (or the IRS) won’t be able to track you down (literally).
What time limits are in place for HMRC to investigate tax avoidance?
HMRC can investigate 4 years from the tax year that an assessment was made.
This increases to 6 years if you have been careless or negligent with your submissions.
If there is anything of deliberately non-disclosure HMRC can go back 20 years.
What are your Responsibilities as a Crypto asset holder?
Complete an annual self-assessment return, if you’re haven’t had to do this before register with HMRC.
Is there a penalty for not registering with HMRC?
Yes, there is s deadline of 6 months within the end of the relevant tax year. I.E October 2021 for tax year ending April 2021.
Is swapping different types of crypto assets liable for CGT?
Yes, exchanging tokens for a different type of crypto asset makes you potentially liable for CGT (even into Stablecoins).
What if I buy goods or services that accept Bitcoin for example?
This is still selling a cryptoassets so CGT is payable on any gains.
Is CGT payable if I give my Cryptoassets to my spouse civil partner?
No. But if you give tokens away to anybody else there will be a tax liability
Can I donate tokens to Charity?
Yes you can but you are still liable for CGT.
Can I set up a dodgy charity and act like a Philanthropist?
Does the frequency of my Cryptoassets activity impact tax?
As touched on above income tax may also be payable.
There’s a difference between buying as an investment (crypto or otherwise), holding and then selling out (and hopefully making a gain). In this instance only Capital Gains Tax would be payable. On the other hand, if there is frequent ‘trading activity’ then both income tax and national insurance may be payable. Different rules also apply to whether or not ‘trading activity’ is on a daily basis or whether positions run less than or more than 30 days.
Why, you ask? Because if the frequency pattern shows you derive you income from trading (and remember income is necessary to justify costs) then it’s just like any other job in the eyes of HMRC.
Do I escape all this because Cryptocurrency is a virtual currency?
Dream on dreamer. Whilst there’s no legal definition of a virtual currency the government can do what they like, so button it and take that virtual headset off.
Have you been impacted by worries about tax? Do you feel that the creepy net of regulation and control is too much to bear? You’re not alone (well you are really) and should give the appropriate governing body (or their outsourced representatives) a call.
Seek taxation and legal/financial advice if you need it. This post is written for information purposes