Cryptocurrency, cryptoassets, tax and HMRC investigations

HMRC describes a cryptocurrency (or crypto assets) as "cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically". Put more simply, a cryptocurrency is a digital asset which can be used to pay for goods or services, or bought and sold at a profit or loss.

Cryptocurrencies are not backed by any bank or government and aren’t regulated or controlled. Transactions are conducted between individuals with the value determined at the amount a buyer is willing to pay.

Bitcoin is the largest cryptocurrency, with a market capitalisation of around $600bn, followed by Ethereum. Other popular cryptocurrencies include XRP, Tether, and Litecoin. The top five cryptocurrencies currently account for more than 80% of the market and new cryptocurrencies are emerging. The value of cryptocurrency can change wildly day to day.

The Financial Conduct Authority (FCA) has highlighted the difficulties investors face in understanding the risks in holding cryptocurrency along with the presence of financial market abuse and financial crime in the market for cryptocurrencies. There are also separate crypto mining taxation rules to be aware of, too - and we'd suggest doing so before you venture into this unpredictable market.

If you are going to do business in cryptocurrency, think carefully about these risks and take specialist advice.

What does HMRC say about the tax position of cryptocurrencies?

HMRC has had regard to the emergence of cryptocurrencies since around 2014. At that time, cryptocurrency was not widely used or accepted in exchange for goods or services; HMRC regarded the currency as a ‘speculative investment’ or gamble and had no tax rules to manage it.

With cryptocurrency now accepted by some major institutions, including accounting firms, in exchange for goods and services, HMRC has updated its rule books and published a Cryptoassets Manual, setting out the tax treatment of such assets.

HMRC has said the buying and selling of cryptocurrencies (usually via tokens) amounts to investment activity (rather than a trade of dealing in tokens). In such cases, if an individual invests in tokens they will usually have to pay Capital Gains Tax.

What happens when HMRC asks for information about my cryptocurrency or crypto assets?

When HMRC launches an investigation into your or your business's tax liabilities, they will often ask you to complete a Statement of Assets and Liabilities. Your statement must contain all assets and liabilities of significant value, including:

• those of your minor or dependent children
• those held by nominees
• those held otherwise on your behalf
• those held outside the United Kingdom.

The statement is important and you should always seek the advice of an accountant or tax agent to help you complete it. Ultimately, the statements you make are your responsibility and will be used to calculate the terms of any settlement with HMRC required.

The statement of assets form now has a specific question about any crypto assets held by a taxpayer. The approach underlines HMRC’s determination to seek out all sources of wealth an individual may have. The relevant part of the form is shown below.

If HMRC asks for information about your assets, including crypto assets, you should speak to an accountant or advisor immediately. Crunch works with a specialist partner, Koinly, who can assist you on any matter related to cryptocurrency or crypto assets. If you're keen to learn more about this style of investment, checkout out our DeFi tax guide and find out whether or not crypto assets are cashback taxable with insights from our trading experts - you might just be surprised when learning the tax obligations for crypto airdrops!