HM Revenue & Customs (HMRC), the UK’s tax authority, sent out requests to several top cryptocurrency exchanges last month, for information regarding their customers.
Specifically, the agency sent a letter to three major digital currency exchange providers registered in the country – Coinbase, CEX.io, and eToro – reportedly asking them to hand over lists of the names and transaction details of their UK customers.
HMRC is said to be examining this information to identify potential tax evasion cases. The agency has also released more guidance on how cryptocurrencies are taxed so this move is likely a reinforcement of its guidelines.
It appears that Bitcoin investors should be bracing themselves for a crypto-focused tax crackdown this year, as similar actions have been taken by governments across the globe. The IRS recently sent out letters to over 10000 crypto traders that may have avoided paying taxes.
Eyes set on crypto tax evaders
HMRC’s request for information seeks the cooperation of crypto brokerage firms, with the agency hoping to use the details they receive to get those who may have evaded paying taxes on their crypto holdings.
Tax obligations that individuals will have to report involve the buying and selling of cryptocurrencies. Employees will also be expected to pay tax on income received in bitcoin or in the form of any other digital currencies.
An advisory HMRC issued last year provided policy guidelines that sought to have crypto holders pay either Income Tax or Capital Gains Tax (CGT). Notably, any specific tax will depend on the particular type of crypto transactions individuals undertake.
The examination of transaction details will likely go back to around 2016, meaning that early bitcoin adopters and investors may be spared.
If this turns out to be the case, then the majority of those who will be approached will also be those who entered the space at a time when cryptocurrencies peaked – when the price of Bitcoin (BTC) hit nearly $20k.
Does HMRC actually have a right to this information?
The UK’s tax agency is not the country’s financial regulator, and thus some may say it lacks the legal jurisdiction over such matters relating to the financial details of an investor. This mandate falls under the scope of the Financial Conduct Authority (FCA).
However, it should be noted that the revenue authority’s decision to go after the names and transaction details of bitcoin investors isn’t illegal, given that the FCA and HMRC do work together.
The Revenue & Customs agency has gone on to clarify that its request for information from crypto exchanges falls within its operational reach. According to the agency, cryptocurrency exchanges can “retain” client transaction details completed on the platforms.
It also added that:
“These (completed) transactions may result in potential tax charges and HMRC has the power to issue notices requiring exchanges to provide this information.”
HMRC’s letter to the three exchanges is similar to a move by the IRS in 2017 where they requested info from Coinbase.
It goes without saying that investors should go over their previously filed tax reports to ensure they are compliant. The HMRC can and will go after historical filings so if you failed to declare your crypto holdings or reported them incorrectly – it is a good idea to get them sorted out as soon as possible. You are unlikely to be penalised if you come clean with an amended tax return. You may also want to consult a crypto tax accountant who will be able to guide you on the next steps (and save your crypto gains!).