HMRC’s new crypto tax disclosure facility
Understanding HMRC's new crypto tax disclosure facility
The new disclosure facility introduced by HMRC is a clear indication of the government's heightened interest with cryptocurrency transactions. It's specifically designed to encourage taxpayers to voluntarily disclose any previously undeclared transactions involving cryptocurrencies.
HMRC are well aware that there are a number of investors in the crypto space who have still not disclosed their historic transactions either through ignorance or fear of serious reprisal. HMRC's new crypto tax disclosure facility is intended to provide a straightforward process for taxpayers to report past transactions that may not have been previously disclosed. It is also a method of encouraging compliance with UK tax laws and regulations as they apply to cryptocurrencies.
Features of the new facility
The facility covers a wide range of cryptocurrencies, including Bitcoin, Ethereum, other altcoins (including transactions on De-Fi platforms) and NFT's. The facility is not restricted to trading profits but also includes other transactions like mining rewards, airdrops, and gifts. Unlike previously this facility offers a clear framework for calculating taxes owed on past transactions involving cryptocurrency transactions and guidance on how to report them appropriately.
The facility potentially offers more favorable terms for voluntary disclosure compared to situations where HMRC make a discovery of undeclared transactions.
Who is likely to be affected?
This new disclosure facility covers a wide spectrum of individuals and entities engaging in cryptocurrency transactions. This includes individual investors and traders who have bought or sold cryptocurrencies, professional traders and businesses that accept cryptocurrencies as payment, miners and participants in DeFi (Decentralized Finance) platforms.
Therefore if you are involved in the buying, selling, trading, or mining of cryptocurrencies or any of the transactions mentioned above, it is essential for you to understand your UK tax obligations.
Typically these are the cryptocurrency transactions that are taxable events which may require disclosure to HMRC. For example selling Bitcoin in exchange for fiat currency or using Ethereum to purchase a property.
Using HMRC's new crypto tax disclosure facility
The disclosure process is intended to be straightforward, however it does require careful attention to detail to ensure accuracy and completeness. Here's a step-by-step guide to following this procedure:
Implications if you do not comply
Failing to comply with the disclosure requirements can lead to significant consequences. HMRC is increasingly using sophisticated technology to track and identify undisclosed cryptocurrency transactions. Given HMRC's recent initiatives, we would suggest that HMRC are starting to lose patience with those individuals/businesses who are still non-compliant.
Taxpayers who fail to disclose or inaccurately disclose their transactions may face substantial penalties. These penalties can vary depending on the severity and intent behind the non-compliance. For example, many years ago HMRC offered a disclosure facility for undisclosed foreign income and capital gains on relatively favourable terms. However, those individuals who still have not yet disclosed their sources of foreign income and capital gains to HMRC now face penalties of up to 200% of any tax liability due.
HMRC's new crypto tax disclosure facility marks a significant step towards more robust regulation in this sector. As the crypto landscape continues to evolve staying informed and compliant with HMRC's evolving guidelines is paramount for anyone involved in this space.
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