Crypto tax compliance: A move towards greater transparency

In a significant move towards greater transparency and compliance in the ever-evolving world of cryptocurrency, HMRC has recently launched a new disclosure opportunity to allow taxpayers to voluntarily disclose any unpaid taxes related to cryptoassets, including exchange tokens, non-fungible tokens (NFTs), and utility tokens. Let’s delve into the details of this initiative and explore what it means for crypto investors and the broader financial landscape.

The growing importance of crypto tax

Cryptocurrencies have gained immense popularity in recent years, leading to increased attention from tax authorities worldwide. HMRC has used powers provided by parliament to gather information from entities such as crypto exchanges about their customers’ transactions in, and holdings of, cryptoassets.

As the crypto market ever expands and diversifies, tax regulations and information sharing initiatives continue to adapt on a regular basis to ensure accurate reporting.

Understanding the scope

On 29 November 2023, HMRC announced the launch of a specialised cryptoasset disclosure facility. This facility allows individuals to voluntarily disclosure unpaid tax arising from a wide range of cryptoassets: Exchange tokens (such as Bitcoin and Ethereum), NFTs representing unique digital assets, and utility tokens serving specific functions within blockchain networks all fall within the scope of this initiative.

Benefits of voluntary disclosure

The introduction of this voluntary disclosure service is not just a regulatory measure; it is a strategic move to encourage taxpayers to proactively rectify any unintentional oversights in their crypto tax obligations. By choosing to disclose unpaid taxes voluntarily, individuals will be subject to lower penalties for non-compliance.

Conversely, should HMRC act upon information provided to them by crypto exchanges or other third party and open an investigation before a voluntary disclosure is made, penalties of up to 200% of unpaid tax may be charged.
HMRC’s move to establish a voluntary disclosure therefore underscores the importance of regularising tax inaccuracies before HMRC acts first.

Navigating the voluntary disclosure process

For taxpayers considering participation in HMRC’s voluntary disclosure service, understanding the process is crucial. The initiative involves a self-assessment of tax due on previously undisclosed income and gains arising from cryptoassets, as well as a self-assessment of the appropriate penalty chargeable.

The level of penalty charged under HMRC’s penalty regimes is dependent on what type of behaviour led to the inaccuracy i.e. whether reasonable care was taken, or whether the taxpayer was careless, or whether they deliberately did not ensure their tax reporting was correct.

It is therefore important to ensure adequate representations are made to HMRC at the time of the disclosure as regards to the behaviour which led to the inaccuracy to ensure the lowest penalties.

For those who knowingly failed to disclose crypto gains, specialist advice must be taken as HMRC’s crypto facility does not provide protection against criminal prosecution.

How can we help?

If you are unsure as to whether you have any current or historical tax obligations as regard to your crypto activity, we can help to review your affairs. Where a disclosure of historical liabilities is required, we will guide you through the disclosure process and help to minimise exposure to penalties, tax, and interest.

Please contact Anthony Rose or Nicholas McLeman if you wish to discuss further.

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