The Crypto space is dynamic, full of innovation, and packed with potential. However, there are some crypto tax mistakes to avoid if you want to run a successful business in the crypto sector.
Overview
At our firm, we were among the first to write in-depth about UK tax treatment of crypto transactions. We also predicted HMRC’s approach long before their Cryptoassets Manual was even published. What's more, unlike many of our competitors, we’ve also invested in crypto ourselves and so naturally understand the tax pitfalls to avoid.
In this post, we cover some of the most common crypto tax mistakes to avoid. Furthermore this will enable you to stay fully HMRC compliant and avoid the unnecessary aggravation of an enquiry.
Mixing Personal and Business Wallets
This is one of the most common errors we see. Where business and personal crypto transactions are included in the same wallet, you cause a tax and compliance nightmare.
In fact, HMRC stipulate in their guidance the importance of maintaining accurate records of your transaction. They also clearly detailing the records you are expected to keep.
Therefore, the best way to resolve this potential issue is as follows:
Ignoring Tax on Token Swaps and DeFi platforms
This is one of the most misunderstood areas in crypto taxes. Many crypto businesses and individuals assume that staking their crypto on a De-Fi platform is a taxable event until they receive a return.
Those DeFi platforms like Uniswap, Aave, and Compound have introduced further complexity into crypto transactions. Furthermore we've alluded to these potential tax issues previously and some of the problem areas are as follows:
This is one of the most common and dangerous areas to get wrong. You can prevent any tax issues arising from your crypto transactions on De-Fi platforms by taking the following actions:
Poor or Non-Existent Record-Keeping
As we've already mention above, In crypto, bad records mean bad tax outcomes. Unlike traditional businesses, where your bank or software can provide a neat report at year-end, crypto transactions are de-centralised, complex and scattered across multiple platforms.
HMRC’s guidance clearly states that individuals and businesses must maintain detailed, accurate records of every transaction.
Yet many crypto businesses fail to record market value in GBP at the time of the transaction, log gas fees or transaction charges and identify wallets or third-party services involved. Additionally they neglect to track movements across exchanges, cold wallets, DeFi protocols and NFTs
It's vital to Record the date and time of each transaction, type of crypto involved plus the quantity and market value in GBP at time of transaction. Furthermore, it's important to record the nature of the transaction, wallet addresses, exchange IDs, transaction hash/ID for on-chain movements and the fees paid and in what crypto.
Using an online tool to automatically sync wallet and exchange data plus exporting CSVs regularly is a good way of maintaining accurate records. Equally importantly you should reconcile your wallets monthly and not wait until your year-end.
Even if your activity is minimal now, poor records today can lead to large tax headaches tomorrow. Furthermore HMRC has the power to investigate previous tax years. Therefore incomplete records will often lead to assumptions that favour HMRC – not you.
Not considering the VAT implications properly
Crypto businesses often assume that their activities are not subject to VAT. This assumption can often lead to serious – and expensive – consequences.
Whilst HMRC currently accepts many transactions involving exchange tokens are outside the scope of VAT this is largely because they are treated like currency or as exempt financial services.
However, crypto businesses are not automatically VAT exempt. The details of what you do – and how – really matter.
When VAT is applicable
The following transactions involving crypto will potentially result in a VAT liability for a business:
In all of these cases, the supply may be considered VATable by HMRC, regardless of the payment method used.
Non- VATable crypto transactions
Nevertheless, there are still circumstances where VAT does not apply to crypto transactions:
VAT - NFT's and utility tokens
As we've mentioned previously, NFTs and utility tokens present a new frontier for VAT. Where your business sells NFTs that grant access to exclusive content or experiences, represent rights to goods or services include ongoing royalties or subscriptions they could fall within the scope of digital services and thus be VATable
In other words, the underlying supply could be VATable, even if the token itself is on-chain. This is a grey area that HMRC has yet to fully clarify. Therefore if you run a business in the NFT space tread carefully!
We recommend you assess what you're supplying, not just how you're being paid. Additionally, check whether your service qualifies as a VAT-exempt financial service or not.
Failing to account correctly for VAT is one of the most overlooked risks in crypto businesses. Don’t assume you’re out of scope just because you’re using blockchain tech.
For many crypto businesses, VAT isn’t a headline issue .However it’s a silent threat that can create large, unexpected liabilities if ignored.
Summary
When we say we “get” crypto, we mean it. We’ve helped our clients structure, scale, and stay HMRC-compliant every step of the way.
Crypto tax is complex. But getting it wrong can prove even more expensive. With correct and timely advice, your business can thrive, remain compliant, and avoid unnecessary costs. Don’t let a simple mistake turn into a major problem.
For more useful information, check out our Ebooks here
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].
Alternatively, please feel free to complete our Business Questionnaire here.