Who will defuse the crypto taxation time bomb? - Jim Duffy

Is there a single accountancy practice in Scotland or the UK that understands cryptocurrency? Well, the practice that does go the extra mile to understand it will win big. And not just in the short term…

Many investors hold Bitcoin for five years

HMRC is already making moves into taxation on cryptocurrency investment gains. It needs to stay ahead of the curve as the gains made by millions of investors both amateur and professional could be substantial. A new crypto page has appeared on the HMRC website dedicated to crypto. Essentially, some guidelines in taxation, but more a warning shot to those who think their crypto gains are hidden, separate from normal tax rules or don’t really count. I’ve got news for you – they do and the last thing you want is HMRC crawling all over your wallets and gains. Hence why a decent accounting outfit that takes a lead on cryptocurrency taxation will be a winner.

For many of you out there, looking inwards at the wild, wild land of crypto the price of Bitcoin is probably the primary arbiter of focus. Yes, it is volatile and looks a bit like funny money, but this is now a recognised asset class, that is making a great deal of people lots of money. This can be broken down into three main groupings.

The first is the “Hodlers”. This group of investors buy crypto assets like Bitcoin, Polkadot or Cosmos and simply stick it in a digital wallet and forget about it. A bit like buying a fund or a share really. They have done some homework and believe that holding the asset for a number of years will mean capital growth. This is mainly the investment case for Bitcoin as present – as a store of value. Holding Bitcoin for five years is a simple strategy that many now employ. If they cash it in, in the future, there could be a capital gain to be paid to the taxman, should it indeed appreciate.

The second grouping is the day traders. These folks buy and sell crypto rather like regular stocks and shares traders. They make small bets, use leverage and can make quick gains and losses within minutes. It’s not my cup of tea. But, there are tax implications here too. So, keeping accurate records is a must. My feeling is that many will not and happily “forget” gains made hoping it will never come to light. Then one day in the future they will need a crypto accountant to sort it all out.

Finally, we have the “stakers”. These folks in my opinion are super smart. They stake their crypto within the actual blockchain they buy from. For example, Cardano, Tesoz and Polkadot all allow staking which generates annual returns of between five per cent and 12 per cent. In short, buying these cryptos and locking them up with the providers for a dividend. And this will again trigger taxation as they are paid this ‘dividend” in some cases every five days. And it all raises taxation questions for the future.

What is a dividend? What is a capital gain? What expenses or allowances are allowed? And while I think I have the answers, HMRC in the future may disagree. Hence, I believe there is a ticking time bomb in crypto taxation that requires a progressive forward thinking accountancy firm to take up the mantle and step forward.

Any takers?

Jim Duffy, MBE, Create Special