Don’t forget to report crypto asset gains on tax returns!

The Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) are reminding crypto asset investors to include their gains (and losses) in their 2021/22 tax returns as the 31 January deadline looms.

Crypto assets, such as Ethereum, Bitcoin and non-fungible tokens, are as much subject to income tax and capital gains tax (CGT) as any other chargeable asset. When an investor realises the value of a crypto asset for tax purposes and makes a profit over a certain amount (currently £12,300), they are obliged to pay CGT by the 31 January following the end of the relevant tax year. Gains made in 2021/22 therefore need to be reported by 31 January 2023 with all necessary tax paid. Likewise, if a loss has been realised, this can only be offset against other gains from the same or future years if they are reported to HMRC. Those who are trading in crypto assets, or receive them for services they carry out, will be subject to income tax on their profits.

The concern of CIOT and ATT is that many investors simply won’t be aware of these obligations or of how wide the range of circumstances are in which gains can be ‘realised’ for tax purposes. The phased reduction of the CGT annual exemption from £12,300 to £6,000 in April 2023 and to £3,000 from 2024 will only make the issue more acute.

Gary Ashford, chair of the joint CIOT/ATT Crypto Assets Working Group, said:

“Crypto asset investors need to check carefully this month to make sure they are tax compliant.

“Not only can cryptocurrency investments trigger capital gains tax liabilities that are not obvious to the investor, but tax can be payable even where the investor does not think his or her crypto investments have been profitable.

“Selling, lending or ‘staking’ crypto assets – or potentially even just transferring assets between crypto sites and portfolios – will usually trigger a disposal in the tax year in question, even if no cash is taken out and even if the portfolio now shows that there would be losses if all investments were cashed now. Events since the end of the tax year (since 5 April 2022 for the gains that need to be reported this month)¹ are irrelevant to the tax liability for that year, which is now closed.

“A further problem is that because tax laws were never written with crypto assets in mind, the tax treatments of some activities are unclear or controversial so taxpayers and their agents need what little time there is left before 31 January to assemble information and think about the right way to report it on the tax return.

“These problems should not be ignored: HMRC have identified that there is a risk of underreported gains in this area and have a special focus on crypto compliance.

“What is striking is that so many different types of taxpayer face unexpected issues from the tax rules governing crypto. Many low-income taxpayers will have invested in these assets but barely a third will be professionally represented or have a good understanding of CGT, nearly half having not seen any information/guidance on the subject. 84 per cent of crypto asset owners won’t have sought tax advice.²

“People resident in the UK but with a long-term ‘domicile’ elsewhere (non-doms) who are currently claiming the remittance basis may not realise that HMRC regard any crypto investments held by UK residents as UK situs assets, generating income and gains fully taxable in the UK. Also, if they use offshore income and gains to acquire a crypto portfolio they could well be making remittances and thus triggering UK tax charges at their highest rate of tax. Crypto assets are chargeable for inheritance tax purposes too, so that is another aspect non-doms need to be aware of.

“Tax agents need to be asking their clients whether they have been investing in crypto, and crypto investors who do not have tax agents need to think about taking advice on this.

“At the moment, crypto assets are not regulated commodities, so as well as being unaware of their tax obligations, many people may be at risk of losing their investments entirely with no recourse. The recent collapse of FTX shows the potential vulnerability and risks of disastrous consequential losses involved in crypto investment, and this message needs to be gotten across to those who are unaware of those risks and cannot afford such losses.”