Ensuring your crypto taxes are HMRC compliant: key considerations
HMRC's guidance details the records to be kept. However, there are other issues to consider when ensuring your crypto taxes are HMRC compliant.
Overview
When we first posted about crypto tax treatment in the UK information on accounting and disclosure to HMRC was scarce. Despite clearer guidelines now, many still falsely believe no disclosure is required until crypto is exchanged for fiat currency.
As a result, this widespread misconception led HMRC to introduce a disclosure facility last year for crypto investors. Therefore voluntary disclosure of historic transactions is crucial for ensuring your crypto taxes are HMRC compliant.
Using the right online tools
HMRC has outlined the expected standard of record keeping for crypto investors. The first step to ensuring your crypto taxes are HMRC compliant is to ensure the use of software to formulate your transactions.
With multiple offerings available, choose software that aligns with the UK tax treatment. Moreover be aware that default settings might not be set to the UK jurisdiction. Therefore you should ensure the software accurately reflects profits/losses from capital gains and from income events.
Importing data for your transactions
There are three primary methods to import records of your crypto transactions into software:
Direct sourcing from the blockchain
Some tools can read your wallet's transaction history directly from the blockchain with the public key. This method is fast but may not be available for all crypto exchanges.
Formatting CSV files
The majority of of exchanges allow downloading transaction histories as CSV files. You control your data but formats can vary widely and compatibility with software might be an issue.
Using API keys
API's from centralised exchanges allow real-time data extraction. Because this method is reliant on the exchange for data if services stop or data retention is limited, data loss can occur.
Potential issues with data
Lack of regulation in the crypto space leads to compliance issues. Here are some potential problems.
De-Fi exchanges
Decentralised exchanges are unregulated, making records keeping unenforceable. However transactions via a users wallet can still be downloaded in CSV format.
Missing transactions
Incomplete records are common Exchanges might go bust (e.g. FTX) or historic data might be unavailable. Moreover the software might default to a NIL base cost, resulting in higher gains. Justifying a higher base cost might require evidence such as bank records.
Incorrectly identified transactions
Data formats vary across exchanges, leading to misidentification of transactions. For example a deposit may be treated as income, or a transfer between wallets as a disposal. The rapidly expanding DeFi space also creates transactions the software may not recognise.
Summary
Disclosing crypto transactions to HMRC can be complex. Therefore identifying problem areas before reporting is essential. Working with a tech savvy adviser who understands crypto tax treatment and deals with HMRC can be invaluable. Ensuring your crypto taxes are HMRC compliant involves careful planning and the right tools. Don't navigate this alone; expert advice can make all the difference in ensuring your crypto taxes are HMRC compliant.
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