We are finding increasing number of clients are investing in cryptoassets and we are aware that for past tax years there has been little clarity as to how gains and losses on these investments should be taxed. In the last year both HMRC and the IRS have issued updated guidance explaining how they think cryptoassets should be taxed and now they appear to be focussing on increasing the level of compliance with their preferred treatment.
In the UK, HMRC have recently started to write to crypto exchanges and brokers asking for details about their customers. It would be logical to assume that once they start receiving such data they will send “nudge” letters to those whom they believe may have unreported crypto gains. Many clients will be aware of nudge letters from the current set of letters being sent out to taxpayers who have overseas income or gains.
The HMRC approach appears to closely follow the IRS’ recent requests to exchanges and brokers seeking information from them about US taxpayers. Having received information from those exchanges, the IRS has announced that they are writing to 10,000 US taxpayers in August 2019 stating that they know they have accounts containing “virtual currency” and that if they have not been properly reporting these to the IRS they must do so.
The IRS have issued three different types of letter, one which must be responded to regardless of whether the individual has an undeclared amount of tax and two of which only need to be responded to if there is an outstanding liability.
Both the UK and the US tax authorities treat cryptocurrencies as assets or property rather than a foreign currency, broadly meaning that acquisitions and disposals made by an investor are within capital gains treatment, with gains on sale being taxable. This includes both transactions between crypto assets and fiat (i.e. old-fashioned money!!) and where one cryptoasset is exchanged for another.
Data retention is essential and is often the biggest problem taxpayers have when seeking to determine whether or not they have a tax liability. Problems particularly arise when exchanges collapse or an individual closes their account with a provider, losing access to their transaction history. It is recommended that backups of the data are downloaded and retained. A taxpayer’s information retention requirements are the same for cryptoassets as they are for all other reportable income and gains.
If you have received an IRS letter on your cryptoassets we strongly recommend seeking advice and assistance to determine whether you have an undeclared US tax liability. Even if you have not received a letter from the IRS but have cryptoassets, our advisors can help you understand whether you have any UK or US tax reporting obligations for the current tax year or past years. We can also assist you in establishing a sensible approach to ensure you have access to the data needed to calculate taxable gains if and when they occur.