Webinar playback: Cryptocurrency – are you tax savvy?
Many crypto investors will be filing a tax return for the first time. If you have been dabbling with cryptoassets, do you understand your tax obligations?
During this exclusive webinar, we heard from crypto tax specialist Louise Lane from Wright Vigar, who talked through your crypto tax position for the year ended 5 April 2022.
We also heard from Dan Howitt, one of the founders and CEO of Recap.io, the UK’s leading cryptoasset tax calculators. He founded Recap in 2018 after painstakingly trying to manually calculate tax on 50,000 transactions. Recap now supports thousands of customers in three countries in getting their crypto taxes completed in under fifteen minutes.
With 350 million crypto users in the world, by 2024 it’s estimated there’ll be one billion users that have crypto and by 2030 there will be five billion users.
But what is crypto?
Dan Howitt: “HMRC say’s that crypto assets are cryptographically secured representations of value or contractual rights that have the potential to be transferred, stored or traded electronically.
“Crypto is a very new asset class and it’s a nuanced asset class. It’s a completely new type of private property that even the Law Commission acknowledges doesn’t easily fit into current private property law.
“The main sticking points seem to be around ownership. Because we’re crypto assets you don’t technically own them – instead, you control them”.
What are crypto assets?
Dan Howitt: “Crypto assets, they’re new, and they came to light in the 2008 financial crisis with the release of Bitcoin. Bitcoin is very famous for having an anonymous creator called Satoshi, who encoded the times ‘3rd January 2009 Chancellor on the brink of a second bailout for banks’ into the first Bitcoin blockchain.
“Bitcoin was modelled to be a digital representation of gold, a digital store of value that perhaps could compete against all the problems that we were seeing in 2008 and 2009. So Bitcoin has a fixed supply and it’s difficult to create.
“What’s revolutionary about crypto assets is that they can be owned outright in self custody – no banks, no custodians, no middleman.
“That means you can transact them freely and frictionless around the world at a very low cost to anyone that has a computer or even a smartphone. We’re starting to see that major crypto asset adoption is not in the UK – it’s actually in places like Africa or Vietnam, where it’s been used as a medium of exchange, because the majority of those populations are unbanked”.
But following the recent FTX crash, Midlands Editor of TheBusinessDesk.com Sam Metcalf asked, what does this mean for the industry?
Dan Howitt, who has been working in crypto since 2013 says he focuses mainly on user adoption.
He said: “I’ve seen probably four market cycles where we’ve seen incredible highs followed by incredible lows.
“I think the price which is what the media focus focuses on is obviously impacted by these market cycles, but the fundamentals of the technology and the user adoption growth show that this is just an asset class that isn’t going away. I think the industry will recover from this quite quickly”.
For tax specialist Louise Lane, it highlights the “beauty of decentralised exchange”.
She said: “FTX was a centralised exchange where someone has control over your funds. Now it’s going encourage a lot more people who may exchange to buy and sell, to then pull it back into self custody. Look after them yourself and don’t be at the mercy of someone else looking after them for you”.
So what does the crypto market look like?
A recent survey from HMRC showed that 10% of UK adults have held crypto assets at some point. So I put that around about two to three million people in the UK have actually had to crypto assets at some point or still own them.
“I think that’s that’s quite a large demographic of our society and of that survey, 53% of the owners had holdings of over £1000 worth of crypto and 7% had £5000 or more”.
Crypto is accessible to everyone when compared to the opportunities for high net worth individuals. Howitt said: “you might be a really high net worth individual like an Elon Musk, and you can use your assets to leverage your position and take out loans against your stocks to acquire other companies.
“That’s only accessible to the high net worths but with decentralised finance and crypto, it’s accessible to everyone”.
How are crypto assets are taxed and why it’s so essential to have software for this?
Louise Lane from Wright Vigar: “First thing to think about is which tax is applied to your crypto asset activity.
“The next thing you need to think about is is this a business? Am I trading so much am I buying and selling crypto to such an extent that such a level of organisation that this is actually a business? Surprisingly HMRC only only expect this in exceptional circumstances. They’re expecting most people involved in crypto assets are just investing, for buying maybe for the long term hold for capital appreciation”.
For Lane, investors need to treat crypto like foreign currency.
“If you’ve got an employment or self employment contracting work and you’re paid in crypto instead of Sterling, then you need to treat it as though you’re receiving that Sterling equivalent at the date of receipt.
“You need to convert it to Sterling at the date of receipt and record that as income for mining, all of this is taxable, however they’re taxed as something called miscellaneous income. It means that it’s subject to income tax, but there’s no national insurance like you would have for a business”.
“What’s most important is when you’ve got miscellaneous income, you can’t deduct hardware costs like mining rigs, for example, which are quite pricey”.
With new guidance from HMRC regarding the transfer of tokens, for Lane it’s highlighted the importance of using software to understand your tax position.
She said: “When you lock your tokens up we’ve now got to consider has the beneficial ownership of those of those tokens transferred to another party, platform, person protocol.
“What we typically see is investors in crypto will have so many different exchanges and wallets, that needs software to lay it all together. You can’t work out your tax position for your activity on product and then your tax position on coinbase – it has to be all interlinked. Software puts all the information together then beautifully applies the rules to your tax position”.
Calculating your crypto taxes can be quite difficult, but Howitt developed Recap.io to help navigate these challenges.
He said: “Recap.io helps puts your crypto asset accounting on autopilot.
“We connect to all of the places where you can buy or sell crypto and pull in all of your transaction records. When we’ve got all of your transaction records, we can then do all of the complicated stuff that Louise has just mentioned, like valuing your cryptocurrency in pounds, apply in Section 104 rules, the 30 day rule. We do this for UK, US and South African tax regimes”.
A new framework has been introduced by HMRC to create regulation around crypto.
Lane said: “We’re now seeing lots of signals however where HMRC is definitely moving into more of a compliance phase. Key to that is is the CARF which is the Crypto Asset Reporting Framework.
“At the moment, a lot of the exchanges where you buy and sell crypto are outside of the UK, therefore it’s really hard for HMRC to go to them and request information about UK taxpayers.
“The whole idea of CARF when this is adopted is that all exchanges around the world will be required to automatically send reports to HMRC about UK investors activity and this will happen automatically.