Crypto and NFT tax specialists.
We were one of the first UK accountants to post online about the UK tax treatment of cryptocurrency and NFT's. We therefore consider ourselves Crypto and NFT tax specialists. When we originally published our articles online there was no specific tax legislation for cryptocurrency. However our original interpretation of the rules when previously there was little guidance appears to have been confirmed. You can actually read HM Revenue's latest guidance about the tax treatment of cryptocurrency here.
Cryptocurrency and NFT's are entering the mainstream, as evidenced by the publication of this report by the government's cryptocurrency task force. After a slump several years ago, there is now renewed interest in cryptocurrency as an alternative investment. Because HM Revenue's tax treatment of cryptocurrency appears to be evolving, it's now more important than ever to appoint Crypto and NFT tax specialists especially as HMRC have now increased powers to track down crypto tax evaders.
We've also discussed some of the myths surrounding tax and cryptocurrency transactions in our podcast here for Women in Blockchain.
Why we are ideally placed to help you
Many firms of accountants are reluctant to provide accountancy and tax advice for individuals and businesses in the cryptocurrency sector. Unlike many accountants we have actually invested in cryptocurrency ourselves which provides us with a unique perspective not shared by many of our competitors. One example of this is supporting our crypto clients with their mortgage applications by verifying their source of funds.
Being specialist tax advisers for crypto and NFT clients means we have also accumulated a wealth of experience having advised individuals and businesses about cryptocurrency since 2016. We are also one of the few accountancy firms outside of the 'Big 4' to have discussed the tax treatment for cryptocurrency directly with HMRC's crypto team who have now consolidated their policy in a manual dedicated to crypto taxes. We can also provide advice and support on all your crypto related queries. Some of these are set out below, though this list is by no means exhaustive, so feel free to contact us for help.
What cryptocurrency transactions are taxable?
There will normally be a taxable event in the following circumstances:
What taxes apply to my cryptocurrency transactions?
If you're an individual carrying out cryptocurrency transactions then HMRC have indicated in their guidance here that it is likely that Capital Gains Tax treatment will apply. The maximum capital gains tax rate is 20% (as opposed to 45% for income tax) and this is the tax treatment we have successfully obtained from HMRC for all our crypto investors, regardless of the number of transactions involved.
However you should be aware that HMRC consider there may cases where you are running a business which involves trading in cryptocurrencies. If the badges of trade apply to your transactions HMRC will argue you have taxable trading profits. This is likely to be rare, however if this applies to your circumstances Income Tax rules will take precedence over Capital Gains Tax rules.
However, there are some cryptocurrency transactions where Income Tax rules will always apply. Some examples of these are as follows:
How can HMRC discover I've made cryptocurrency transactions?
HMRC have legal powers to obtain information from third parties (e.g. auction houses, banks) as part of an enquiry process. This has been the case for a number of years. These power have been utilised to obtain details of investors from cryptocurrency exchanges and many individual investors have already started to receive correspondence from HMRC.
What if I haven't disclosed my cryptocurrency transactions previously?
You'll need to check your records (see here for details) and ensure your transactions are calculated in accordance with HMRC's guidance You can then make a voluntary disclosure to HMRC. This can be a complex process and you'll need to be satisfied your historical transactions are complete. You also need to pay any outstanding tax due and explain why no disclosure was made previously.
Our staff are ex HMRC and belong to the UK's leading professional body for tax advisers. We have considerable experience of handling HMRC enquiries so are ideally placed to support you if it's necessary to disclose historical cryptocurrency transactions. Just some of the results we have achieved for clients when dealing with HMRC are as follows:
Is VAT payable on cryptocurrency and NFT transactions?
With regard to cryptocurrency transactions, broadly speaking the position can be summarised as follows:
You can read more about the VAT treatment of cryptocurrency in our post here.
As far as VAT and NFT's are concerned, in the absence of any published guidance from HMRC, the position is less clear. It's possible that HMRC may align their VAT treatment with cryptocurrency and therefore make transactions involving NFT's VAT exempt. Equally HMRC might argue that they are digital commodities subject to UK VAT invoking this tax case here.
However as it is not easy to establish the location of the purchaser of an NFT, this would seem to make accounting for VAT across the EU/UK a challenging process. Therefore whilst it is difficult to perceive how HMRC EU tax authorities could implement a retrospective VAT charge on NFT sales, individuals/businesses involved in the NFT space may wish to adopt a prudent approach.
We are a modern, forward thinking IT firm, meaning our client take on procedures are efficient and seamless. Therefore unlike many of our competitors there's no waiting list to join us as a client. Examples of the crypto businesses we look after are as follows:
Because we're also a modern firm using technology to enhance our client service delivery. This means we have a detailed understanding of this rapidly emerging sector and are ideally placed to support you.
As crypto and NFT tax specialists, we have even devised our own bespoke procedure to assist cryptocurrency and NFT businesses in accounting for their transactions correctly.
R-Solutions Ltd
"The Friendly Accountants are a rare breed amongst accountants in that they specialise in and understand what most of their competitors avoid – cryptocurrency.
Cryptocurrency is at the heart of my business and it was critical for me to find accountants and tax advisers who would understand my needs and the business I am in. There are many challenges in keeping good accounting systems when cryptocurrency is involved and TFA seem to have figured it all out!
TFA come across as very attentive, providing plenty of flexibility to suit my business’s needs whilst taking into account my personal circumstances too. They definitely live up to their 'Friendly' brand."
Xero Online Software for cryptocurrency businesses
All our cryptocurrency businesses get access to Xero. Because we've been using this for our own business for years this means we're experts in this system. Because we are crypto and NFT tax specialists we've even written a detailed guide to how to use Xero for Crypto and NFT's. We can therefore give you all the support you need. In our opinion this is the best system for a cryptocurrency business to use and account for their transactions.
If you use online banking then you can use Xero. And you'll wonder how you ever did without it!
To find out more about Xero, watch the Onboarding Videos here.
Client Background
Our client, a forward-thinking limited company, specialises in mining and trading cryptocurrencies. They approached us after facing challenges with their previous accountant who struggled with the complexities of cryptocurrency accounting and the use of accounting software for their unique financial transactions.
Challenge
The primary challenge was to accurately account for the client's diverse cryptocurrency activities, which include crypto mining income, purchasing, disposing of, and using cryptocurrency for payments. The client required a robust accounting solution that could handle the intricacies of cryptocurrency transactions whilst providing clear financial insights.
Using Xero as an effective accounting solution
Tailoring the settings for Cryptocurrency Transactions
We initiated our solution by customising the client’s Chart of Accounts in Xero, specifically aligning it with their unique cryptocurrency activities. This bespoke setup provided the necessary flexibility for handling various cryptocurrency transactions, including the ability to make and receive payments in different cryptocurrencies.
Streamlining Mining Income Management
Xero's adaptability and flexibility was a key strength in managing the client's mining income. We created a system that could efficiently handle whether the mining income was converted to fiat currency immediately or retained as cryptocurrency. Additionally, we introduced a flexible approach to the frequency of posting this income, catering to the client's specific operational needs.
Simplifying Cryptocurrency purchases
When it came to cryptocurrency purchases via the business bank account, we developed a straightforward process for recording and reconciling these transactions in Xero. This ensured that each purchase was accurately reflected in the company's financial records, with the GBP value of the cryptocurrency at the time of purchase correctly allocated.
Versatile Handling of Cryptocurrency Receipts
Our approach to managing the receipt of cryptocurrency as payment was multifaceted, addressing the various scenarios our client might encounter. Whether the client chose to hold the cryptocurrency, convert it to fiat immediately, or needed to generate an invoice for a transaction, Xero's flexibility allowed us to efficiently manage each situation. This adaptability ensured that all cryptocurrency transactions were accurately recorded and reconciled, regardless of the client's chosen method of handling these digital assets.
Results achieved
Summary
This case study demonstrates the effectiveness of Xero in managing the complex world of cryptocurrency accounting and working alongside accountants who are crypto and NFT tax specialists, understand the nuances of cryptocurrency taxes and have an expert knowledge of Xero. Our client benefited from bespoke solutions that not only addressed their immediate accounting needs but also equipped them with the tools for ongoing financial management in the dynamic field of cryptocurrency. They also have a robust set of financial records that will withstand any scrutiny from HMRC.
Advising you on the tax treatment
Being Chartered Tax Advisers (the UK's leading professional body for tax advisers) and ex HM Revenue, we can provide you with expert tax advice. For example, this could be advising you on the most appropriate way to claim losses. Alternatively, it could be determining the correct VAT treatment for your business transactions. Our experience could prove especially useful if you need to disclose cryptocurrency transactions to HM Revenue The nature of your cryptocurrency activities will also determine what type of structure you may wish to use. We'll also be able to assist you in determining whether the income tax or capital gains tax treatment applies to your transactions.
Keeping good records of your cryptocurrency transactions is vitally important. We will therefore confirm what data and records you are required to keep in the event of an HM Revenue enquiry. We're also able to offer fee protection services, covering our fees should there be an HM Revenue enquiry. This should hopefully provide you with added peace of mind.
Interested in expert cryptocurrency accounting solutions?
Contact us to explore how we can integrate Xero into your business for seamless financial management.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].