Tax profession tiptoes into crypto

Backdrop
Crypto assets, and the associated technology (mainly blockchain) are growing rapidly. The market capitalisation was around $3 trillion in 2021. The current market (summer 2022) capitalisation has reduced to around $900 billion, the significant drop recently from a huge market correction, following a less significant correction of the general world equities market.

Despite the correction, it seems clear (more than ever) that crypto is here to stay. We are seeing some private banks offering crypto investments to clients, and an acceptance in investment banks that most clients will have some exposure to crypto assets.

A recent HMRC survey confirmed that 10 per cent of adults in the UK hold crypto assets.  Of that population 53 per cent hold amounts of up to £1,000, whereas seven per cent hold portfolios of around £5,000.  (As the author of this document, I have met individuals with portfolios worth tens of £ millions).

[Further, it has been stated HMRC identified nearly £2.3m in suspected underpaid tax concerning crypto assets in 2021-2022, over five times more than the previous year.]

Significant developments are taking place globally, mainly driven in developed economies such as the UK, EU and the US. Those developments include the introduction of Regulatory frameworks, interest shown by central banks in introducing their own digital currencies, and tax authorities providing clarity, or tax frameworks around crypto assets.

HMRC have led the way on taxation guidance and the CIOT and ATT have been part of the working group helping HMRC with this. I have also assisted the OECD Business Advisory Group (BAG) participate in the ongoing developments for Common Reporting Standard (CRS) and the introduction of the proposed Crypto Assets Reporting Framework (CARF).

The taxation guidance, whilst detailed in parts, is still in relative terms in its infancy, and as is the case with new, developing technology, the guidance will need to be developed and altered over time.  I believe there will be a need for specific legislation.

In April 2022 the then UK Economic Secretary to the Treasury, in a keynote speech at the Innovate Finance Global Summit, set out that the UK sees crypto as a key part of the UK retaining its place as a pre-eminent financial centre.

Since then HMRC have launched a call for evidence around the taxation of Decentralised Finance involving the lending and staking of cryptoassets, in particular whether various aspects of UK financial services taxation should extend to crypto assets.

As stated above, the CIOT and ATT have already been working with HMRC in terms of the ongoing guidance. 

However, given the growth of crypto generally, and the fact that many members of both the CIOT and ATT are facing clients with crypto assets, it is the right time for CIOT and ATT to set up a joint working group.

What the working group can do - Set out below are some of the areas where the working group expects to participate.  It is not meant to be exhaustive.

Responding to consultations
HMRC and other UK Regulatory authorities are very active in the space and so, there will be a need for ongoing consultation.  The new working group can assist in responding to such consultations, including the current call for evidence on DeFi.

Engagement with HMRC
CIOT and ATT have been working closely with HMRC in terms of developing the UK taxation guidance and also are represented on the HMRC crypto working group. This will continue, and more likely will need to increase, as crypto becomes more mainstream.

There are various challenges around the tax compliance of crypto assets and so, there will be a need to engage with HMRC, to help deliver a compliance framework that is efficient and effective.

Support to members
Members will become more and more exposed to crypto assets, through working with their clients. The Working Group should work with HMRC and other stakeholders to improve awareness and guidance available to members and the general public. The CIOT’s Low Income Tax Reform Group (LITRG) will also work to provide basic guidance for the unrepresented. Note that the CIOT and ATT do not have the resources to provide replies to individual technical questions, but will take on queries which bring to light anomalies in, or problems with, tax law or administration.

The working group will also liaise with other parts of CIOT and ATT, such as Professional Standards, to assist in the preparation or updating of guidance such as in relation to engagement letters, use of data provided by third parties etc.

Support to CIOT/ATT technical committees
As crypto assets become more mainstream, the taxation issues will impact on many, if not all of the CIOT and ATT technical committees. The working group can provide support to all of those technical committees.  This will be more efficient that implanting a crypto expert in each of the groups, which could lead to silos. There is a broad representation across the working group of volunteers from the CIOT and ATT committees.

Collaboration with other stakeholders
As other governmental stakeholders look at various aspects around the regulation of crypto, this will have a knock-on effect to taxation issues. The working group should look to identify and build relationships with some of these stakeholders. One example is Crypto UK. They are already collaborating with the Government via the Crypto Asset APPG.  The working group should look to work closer with the APPG.

Digitalisation
It is clear that tax authorities are looking at blockchain technology and real-time reporting as a means to better manage and protect tax revenues. The working group should look carefully at how blockchain technology (and other associated technologies) might impact on the tax system. It should also consider whether crypto assets, and associated technologies, will introduce any additional burdens, challenges, or even efficiencies or alternative ways of working that we can share with HMRC.

The working group’s remit
All our technical committees and working groups have a short remit. The Crypto asset working group’s remit as set out below:

The remit of the Crypto assets working group covers all aspects of the taxation of crypto assets, including (but not limited to) working to ensure that existing legal regimes and guidance are adequate, promoting a greater understanding of the taxation of crypto assets, and working collaboratively with HMRC and other stakeholders to encourage tax compliance.

Blog by Gary Ashford, CIOT Deputy President

The group would welcome feedback from members, particularly of areas of difficulty or uncertainty involving cryptoassets. Please send any feedback or comments to [email protected] or [email protected]