Tax advisers must seek to expand their knowledge on cryptoassets to retain clients as pressure mounts on traders to disclose their earnings, industry figures have said.
“It’s quite easy to say, ‘I don’t understand crypto, go somewhere else’, but if you’re a professional accountant, I think you should have at least the baseline level of information,” says Chris Barnard, tax adviser at Accounts and Legal.
“It’s far better to be proactive in this. That might be the difference between keeping a client and losing them.”
An unruly market
At present, HMRC typically takes the view that cryptoasset earnings are chargeable to capital gains tax. This is outlined in its official guidance, the ‘Cryptoassets Manual’, which was published in March 2021.
But because digital tokens are a new asset class, there is currently no official legislation as to how earnings should be taxed. As a result, a number of different interpretations and loopholes can be applied.
In response, the UK government is now attempting to tighten its regulatory grip on the market, having contacted exchange platform Coinbase in November 2021 requesting the disclosure of any members who had earned at least £3,000 in the previous tax year.
‘Nudge’ letters were subsequently distributed to the addresses of these individuals encouraging them to seek tax or legal advice.
“It’s more to look at changing people’s behaviour and getting them to consider what action they need to take,” says John Lewis, senior tax consultant at Markel.
“It might be that people haven’t made disposals and have actually made losses, and there might be a number of reasons as to why they don’t need to notify HMRC – but they should take those letters as an opportunity to review.”
Barnard goes on to stress the significance of this development for the advisory community. It will naturally generate new business opportunities, but more importantly, it will reinforce accountants’ “duty of care”, he says.
“It’s very important for accountants to be doing something in this situation. What you don’t want is for people to be ignoring the letters, and then two years down the line you’ve got investigations and penalties against individuals.”
This point is echoed by Lewis, who argues that the stigma around digital tokens has made it feel like an unapproachable topic for many advisers.
“I don’t think it’s as daunting as people have been made to feel. Yes, it’s a new area and there are some grey areas within it, but generally speaking, I think it’s just a new and exciting area for potential investment.
“By expanding their knowledge base and taking the time to review HMRC’s guidance, they’ll come to learn that it’s not as difficult an area as they first feared.”
The future of crypto tax
However, Lewis goes on to acknowledge that, in an unruly market with a general lack of education and awareness, a number of key stakeholders must act to simplify the landscape.
HMRC, for instance, must accept some degree of responsibility, he says.
“I think they [HMRC] could partner with the most used platform, perhaps through an advertising campaign, just to let people know that they might want to consider the tax implications of what they’re doing and get them to seek professional advice.”
Lewis also argues that “greater attention needs to be drawn” to the vast array of cryptoasset tax calculators available online, and that many are not applicable due to being geared towards US legislation.
Similarly, Barnard argues that, with the digital token market growing and changing rapidly, HMRC must update its guidance more regularly.
“People think of crypto as just buying and selling bitcoin, but there’s far more different areas of the blockchain now, and I don’t think they’re keeping up to date in terms of all those developments.
“If they want more revenue from this, they need to put resources into keeping the guidance updated.”
In addition, Barnard argues that advisory firms must take note of the direction of travel in the cryptoasset space to adequately prepare for the future.
He advises firms to equip themselves with an applicable software product, such as Koinly.
“Step one should be to get all of your transactions onto a decent crypto tax software product – that’ll do the hard work.
“This means that when clients do need a self-assessment, we can view it on a more timely basis.”
A key part of this is that “the future of accountancy is business advisory first, not compliance”, Barnard adds.
Barnard is among a growing number of accountants calling for greater vigilance from cryptoasset exchange platforms, explaining that initiatives such as tax education and anti-money laundering protocols are essential to creating a safer and more efficient ecosystem.
“While we aren’t able to provide tax advice, we do offer resources such as tax statements on our website to make users aware of the tax implications when investing in assets such as crypto,” said Dan Moczulski, UK managing director at multi-asset brokerage platform eToro.
“This is an area that is particularly important for users to understand, and even more so for novice investors, who may not have considered the tax implications of investing.”
Alongside offering education materials, eToro also partners with a number of tax accountants, Moczulski noted.
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