Cryptocurrency has gained traction in recent years, however there is still uncertainty and controversy surrounding it due to its often unpredictable and volatile nature.

A lack of regulation has also been seen as a serious problem, which is why HM Revenue and Customs (HMRC) is increasing its focus on the taxation of digital currencies.

HMRC’s latest initiative is a service for taxpayers to voluntarily disclose unpaid tax on cryptoassets.

Understanding cryptoassets

Cryptoassets include exchange tokens like Bitcoin, non-fungible tokens (NFTs), and utility tokens. These digital assets use cryptography and blockchain technology for secure, decentralised transactions.

Benefits and pitfalls

Cryptoassets offer benefits like decentralisation, potential for high returns, and enhanced privacy.

However, they come with risks such as high volatility, regulatory uncertainty, and security issues. From a tax perspective, their anonymity and complexity can lead to unintentional non-compliance.

HMRC’s new disclosure service

HMRC has identified taxpayers involved in cryptoasset transactions who may not have paid due tax.

The new service targets disclosures for the 2022/23 and 2023/24 tax years, which should be reported on self-assessment returns or via HMRC’s ‘real time’ Capital Gains Tax (CGT) service.

For earlier years, disclosures must be made through the new facility, accessible with a Government gateway user ID and password.

Compliance and disclosure

Taxpayers must determine the duration for which they need to declare unpaid tax. This depends on their past diligence in reporting liabilities or any deliberate attempts to mislead HMRC.

The disclosure could span up to 20 years, though the first cryptocurrency, Bitcoin, emerged only in 2008. Those uncertain about disclosure should seek specialist advice.

Paying tax on cryptoassets

HMRC has also released guidance on paying tax on cryptoassets. Taxpayers must understand their obligations to avoid penalties.

International cooperation

The UK’s participation in the cryptoasset reporting framework (CARF), an OECD transparency standard, signifies a global move towards more stringent regulation of crypto transactions.

This framework, agreed upon in March 2023, makes use of the exchange of information on crypto exchanges between international financial authorities.

The cryptocurrency debate will not be going away anytime soon, although HMRC’s latest initiative shows a clear desire to clamp down on taxation of digital currencies, so it is definitely worth keeping up-to-date with any future initiatives or amendments.

If you need advice on taxation on digital currencies or any other guidance on cryptoassets, contact us today.