Is the taxman coming for your digital assets?
by John Hood
In a major move to bring crypto within the purview of tax authorities, the Organisation For Economic Co-operation and Development (OECD) wants intermediaries providing crypto services to individuals and businesses to automatically exchange information on transactions with the tax authorities*. The introduction of a requirement for intermediaries to report crypto transactions will revolutionise how crypto assets are perceived – and taxed.
HMRC has already published guidance on the tax implications of buying and selling crypto assets. But the Common Reporting Standard (CRS), which requires financial institutions to identify where their clients are tax resident and disclose details of their assets and transactions to the relevant tax authority, needs to be adapted to deal with the emergence of crypto trades and of non-tangible assets. As matters stand, intermediaries offering digital wallets may not be regulated or cooperating under the CRS.
The OECD wants to introduce a new framework for the collection and exchange of information for transactions in crypto assets: the Crypto-Asset Reporting Framework (CARF). The purpose of the new framework will be to uncover wider criminality including tax evasion or money laundering.
CARF will provide tax authorities with information previously considered to be hidden from them. Intermediaries will be obliged to report crypto transactions to the tax authority in which the business is based, and the information will then be exchanged with the tax jurisdiction where the client is tax resident. At present, HMRC can formally request information from intermediaries on their users or customers. The introduction of the CARF will make this automatic. HMRC will thus be enabled to build up a database of information on the types and size of transactions that they can use to risk assess individuals involved in crypto transactions.
This will mean that crypto faces closer scrutiny from HMRC. Not only will the tax authority want to know about the transactions in the relevant period, but for how long this has been going on and the extent to which the individuals concerned have profited from these activities. HMRC will be interested in where the funds came from in the first place – and not just in respect of the transactions that took place in the relevant calendar year. If the transactions haven’t been reported, users and customers face an intrusive and detailed tax investigation as to the source of the funds to acquire the crypto assets and any subsequent transactions.
The adoption of the OECD’s proposals will not avoid collateral damage. HMRC may investigate people who have invested in crypto assets as a hobby and not made sufficient profits or gains from their activities to be subject to tax. All crypto users face enhanced due diligence, and anyone affected by the announcement would be wise to seek tax advice now, before the new reporting requirements come into force.
John Hood is a tax Partner with Moore Kingston Smith