HMRC yesterday issued the largest crypto tax advice document in the world – a whopping 4,400 words – detailing how investors making money with cryptocurrency should be paying tax on their profits. It signals the government’s intention to embrace the likes of bitcoin, Ethereum and Ripple from 2019 as they become more popular with the British public. It also flags a desire by the tax office to cash in on a secretive and elusive market thought to be worth billions. It is understood that the Bank of England has been looking hard at exploring opportunities with cryptocurrency for several years, and that the government has pushed select committees into examining what role cryptocurrencies can play in the UK economy.
For now, however, HMRC officers have been tasked with cleaning up the industry before the government can press ahead with future plans.
The sudden hard-line stance has been applauded by some of the country’s leading academics in crypto finance.
Professor William Knottenbelt, Centre Director of Imperial College London’s Centre for Cryptocurrency Research and Engineering, said: “It’s going to get very uncomfortable for the bad guys, and a whole lot better for the good guys.
“It’s long overdue, and I think the government has spent a long time working out what its relationship should be with decentralised technology that could then be taxed.”
Professor Knottenbelt explained the move also paved the way for more regulation across an industry largely viewed from the outside as lawless.
He said: “There has definitely been a general increase in regulation and identity checking across the industry, and that shouldn’t be seen as a bad thing because if you’re a bad actor with a lot of crypto hidden out there, you’re now going to have a very hard time moving it around.
“This should be seen as a very positive development, as in the space is being cleaned up a lot.”
The top academic suggested the government would be keen to explore further uses for blockchain – the underlying technology of cryptocurrencies – as it would actively assist with forensic accounting techniques.
He said: “Blockchain technology logs everything like a crime scene – nothing escapes it.
“Far from being a murky and dirty space, a lot of the properties of blockchain allow you to operate a cleaner market.”
His views were echoed by another highly respected figure in UK cryptocurrency and FinTech, Professor Carol Alexander.
Professor Alexander, who is Leader of the Crypto Market Risk Group at the University of Sussex, said: “It is good news that the UK tax authority is leading the world for individual investors – although FINMA – the Swiss authority – already issued guidelines for institutional investors almost a year ago.
“It seems clear that capital gains tax will be applied to individuals, with no additional taxes.
“However, what is not yet clear is whether the many traders that have lost 90 percent of their investment over the last year will be able to offset the loss against capital gains on traditional assets such as US equities.”
Although unable to address Professor Alexander’s concern, a spokesman for HMRC said the body was working hard on “our understanding of this complex area”.
The spokesman said: “This new guidance will help people better understand the tax implications from the buying, selling and holding of crypto assets.
“For the individuals that may have invested small amounts into ‘cryptocurrencies’, it is very unlikely they will have to pay any additional tax.”
Although welcomed by experts keen to see the industry cleaned up, Professor Alexander did suggest the guidelines were wide open to abuse.
She said: “We need clarity on how HMRC aim to overcome the challenge of pseudo anonymous trading on exchanges having poor KYC (know your customer) practices.
“Are they going to restrict lawful trading to Coinbase and the handful of other exchanges with traceable wallet addresses?
“If not then it will be very simple for ordinary investors to hide profits from HMRC.”