Many cryptocurrency investors file their tax returns for the first time. Do you understand your tax obligations if you are dabbling in crypto assets?
In this exclusive webinar, we spoke with Louise Lane, a crypto tax expert at Wright Vigar, about her crypto tax position for the year ending April 5, 2022.
We also spoke with Dan Howitt, co-founder and CEO of Recap.io, the UK’s leading crypto tax calculator. He founded his Recap in 2018 and struggled with manually calculating taxes on 50,000 transactions. Recap currently supports thousands of customers in 3 countries and can complete crypto tax in under 15 minutes.
There are 350 million crypto users in the world and it is estimated that by 2024 there will be 1 billion crypto users and 5 billion by 2030.
But what is cryptography?
Dan Howitt: “HMRC states that crypto assets are cryptographically protected representations of value or contractual rights that may be transferred, stored or traded electronically.
“Cryptocurrencies are a very new asset class and a nuanced asset class. .
“The main pain point seems to be ownership. We are crypto assets, so technically you don’t own them, you control them.
What are crypto assets?
Dan Howitt: “Crypto assets are new and came to light with the release of Bitcoin in the 2008 financial crisis. It is very famous that there is an anonymous creator called Satoshi who encoded the time “Prime Minister in Time” into the first Bitcoin blockchain.
“Bitcoin was modeled as a digital representation of gold, a digital store of value that could compete with all the problems we saw in 2008 and 2009. are difficult to create.
“The revolutionary thing about crypto assets is that they are self-managed and fully owned. No banks, no custodians, no intermediaries.
“This means that anyone with a computer or smartphone can trade freely and frictionlessly all over the world at a very low cost. We’re starting to see it being done in places like Africa and Vietnam, where the majority of these populations don’t have bank accounts, so it’s being used as a medium of exchange.”
But in the wake of the recent FTX crash, TheBusinessDesk.com’s Midlands editor Sam Metcalf asked what this means for the industry.
Dan Howitt, who has been involved with cryptocurrencies since 2013, said the focus is primarily on user adoption.
he said:
“While I think the price that the media is focusing on will obviously be impacted by these market cycles, the growth in technology fundamentals and user adoption shows that this is just an asset class that won’t go away. I think the industry will recover pretty quickly from now on.”
Tax expert Louise Lane highlights the “beauty of decentralized exchanges.”
she said: Now we are trying to encourage more people to trade and buy and sell and possibly return to self-management. . ”
So what does the crypto market look like?
A recent study by HMRC showed that 10% of UK adults have owned crypto assets at some point. This means that about 2-3 million people in the UK have actually had or still have assets in crypto at some point.
“It’s a very large demographic of our society and in that survey I think 53% of the owners held crypto worth £1000 or more and 7% held £5000 or more. increase”.
Compared to the wealthy individual opportunities, crypto is accessible to everyone. Howitt said:
“Only the wealthy can access it, but with decentralized finance and cryptocurrencies, anyone can access it.”
How are crypto assets taxed and why is software essential for that?
Louise Lane of Wright Vigar: “The first thing to consider is the taxes that apply to crypto activity.
“The next thing to think about is whether this is a business. Is this an organization at the level of a business that is buying and selling cryptocurrencies? Surprisingly, HMRC is an exceptional We expect this only in context: they expect most people involved in crypto assets to simply invest.
For Lane, investors should treat cryptocurrencies like foreign currency.
“If you have a contract of employment or self-employment and are paid in virtual currency rather than in sterling, you should treat it as if you received the equivalent of sterling when you received it.
“You have to convert it to British pounds on the day you receive it and record that it is all taxed as mining income, but these are taxed as what is called miscellaneous income. There is no such national insurance.”
“Most importantly, if you have miscellaneous income, you can’t deduct very expensive hardware costs such as mining rigs.”
With new guidance from HMRC on token transfers, Lane emphasized the importance of using software to understand your tax position.
she said:
“What we often see is that crypto investors have so many different exchanges and wallets that they need software to bring them all together. You can’t calculate your position and your tax position in Coinbase, you have to correlate everything.The software brings all the information together and applies the rules beautifully to your tax position.”
Calculating crypto taxes can be very difficult, but Howitt developed Recap.io to solve these challenges.
he said:
“We connect to all the places where you can buy and sell crypto, and we get all the transaction records. Once we have all the transaction records, we can do all the complicated things Louise mentioned. We value cryptocurrencies in pounds and apply the Section 104 rule, the 30-day rule, which we do for UK, US and South African tax regimes.”
A new framework has been introduced by HMRC to create regulations on cryptography.
Mr Lane said: Key to that is his CARF, the Crypto Asset Reporting Framework.
“At the moment, many of the exchanges that buy and sell cryptocurrencies are located outside the UK, making it very difficult for HMRC to go to those exchanges and request information on UK taxpayers.
“CARF’s overall thinking when this was adopted was that all exchanges worldwide should automatically send reports on UK investor activity to HMRC and this would be done automatically. It means that you will be
