Following concerns about the non-compliance of cryptoasset owners in relation to tax disclosure, HMRC has urged investors in cryptoassets to declare any income or gains above the tax-free allowance. The announcement came at the end of 2023 after the government estimated that tax non-compliance among cryptoasset holders could “range from as high as 55% to 95%”. HMRC have launched a voluntary disclosure mechanism encouraging the public to declare unpaid tax on crypto investments.
Voluntary Disclosure: How Does It Work?
Disclosure tools have previously been used to allow taxpayers to declare unpaid tax. However, this is the first time HMRC has launched a process specifically targeting cryptoasset owners. Therefore, it’s important to understand how this scheme will work and who will be affected by it. In this article, we’ll walk you through everything you need to know about HMRC’s new disclosure mechanism.
Who Needs To Declare?
In many cases, cryptoasset holders are unaware of the rules surrounding tax declaration and who they apply to. This has led to a high level of non-compliance among this demographic. According to a study by the Financial Conduct Authority (FCA), the mean value for UK investors with cryptoassets is around £1,600. This means that most investors fall within the annual tax-free allowance for capital gains tax. However, as this allowance has been reduced to £3,000 in recent years, even those with relatively modest investment portfolios may need to consider their tax position.
Those holding cryptoassets will be subject to capital gains tax on the following activities:
- Selling cryptoassets in exchange for regular currency;
- Exchanging cryptoassets for other cryptoassets;
- Gifting cryptoassets to anyone other than a spouse or civil partner; and
- Using cryptoassets to buy goods or services.
In some exceptional circumstances, an individual transacting in cryptoassets may be deemed to be trading and subject to income tax rather than capital gains tax. For further support in understanding where you stand on the tax rules for crypto assets, get in touch with the expert team at Digital Tax Matters.
How Far Back Do The Rules Apply?
Despite the different nature of cryptoassets, the same rules apply when determining how far back an individual needs to go to correct their affairs. This means the rules are as follows:
- Individuals must look back four years where they have taken reasonable care with their tax returns;
- Six years where reasonable care was not taken;
- And up to 20 years where they have deliberately misled HMRC about their income or gains.
If you need to report income or gains on cryptoassets that relate to the tax year 2023-24 these can be added to your self assessment tax return. For gains relating to 2022-23, there is still time to amend a previously submitted return.
Is This The Right Disclosure Method For Me?
The new disclosure service is intended for individuals with historical income tax or CGT to disclose. Investors still have time to submit a return relating to 2022/23 and can still amend an incomplete submitted return from 2021/22.
Despite HMRC’s push for cryptoasset investors to declare their taxes, the new disclosure mechanism may not be your best option. Using this route is not compulsory; those with more complex affairs should seek professional advice on the best disclosure route for their circumstances.
The alternative routes are as follows:
- The contractual disclosure facility (CDF), allowing for voluntary disclosure of tax fraud.
- The worldwide disclosure facility (WDF), where part of the undisclosed tax relates to an offshore matter.
- The general digital disclosure service, which may be relevant if there are other taxes involved, not just income tax and capital gains tax.
Moving Forward
HMRC’s latest reminder is unlikely to be the final word on cryptoassests as they look to crack down on undisclosed taxes. The government has announced that for 2024/25 tax return and onwards, cryptoasset disposals will need to be separately identified in capital gains tax pages. This move will make it easier for HMRC to identify missing disclosures.
For help navigating the world of cryptoassests and tax disclosure, don’t hesitate to reach out to Digital Tax Matters’ team of expert accountants. With years of industry experience, our team is perfectly placed to help you manage your affairs.