The digital asset market has attracted significant media interest in recent years. Rises and falls in the value of digital assets, significant losses arising from fraud (including ‘rug pulls’, romance, and ‘pig butchering’ scams) and the collapse of large players in the ecosystem (including exchanges) has attracted mainstream media attention (and continues to do so).

In amongst the stories of those who have suffered losses (including losing their entire life savings) are the individuals and businesses who made considerable amounts (legitimately) during those same stages of the market. For some, the interaction or dealings with digital assets will form part of their key business strategy. However, this will not always be the case and levels of sophistication will undoubtedly vary.

In addition, there are other organisations and individuals who may have elected to make or receive payments in digital assets (or reward their staff with digital assets). In a slightly different sphere, the explosion of the NFT market resulted in many organisations and individuals acquiring and selling tokens that represent digital media (some of which provide other membership type benefits). Some of the reported values were significant.

These situations give rise to potential tax consequences. Particular areas of interest stem from the greater adoption and consideration of value received from activities such as staking and mining (in addition to just buying and selling). It is, therefore, unsurprising that it is an area also being carefully considered from a tax policy perspective (which will undoubtedly benefit from that regulation and transparency).

Against that background, HMRC have very recently set up a specific guidance section of their website which encourages the disclosure of unpaid tax liabilities relating to digital assets. This reinforces the emerging position that the collection of tax relating to digital assets is an area of increased focus for HMRC.

The new HMRC guidance sets out the number of years of tax that will need to be repaid in respect of cryptoassets, which depends on why there was an underpayment in the first place.

  • If the taxpayer took reasonable care to ensure that their tax affairs were in order, but still failed to pay enough tax, their liability will be limited to four years.
  • If enough care was not taken to ensure that the taxpayers affairs were right, the liability is extended to six years.
  • If the taxpayer deliberately misled HMRC about the income from cryptoassets, the liability is extended to a maximum of 20 years.

Where the correct tax has not been paid, interest and penalties may also be applied by HMRC in respect of the unpaid tax.

Whether or not a penalty is applied and the level will depend on the reason for the underpayment, whether the disclosure was prompted or unprompted and quality of the disclosure made to HMRC.

What taxes may apply?

This is a constantly developing area and a full detailed analysis is far beyond the scope of this short blog. Each assessment and outcome will be fact specific. The purpose of the below is to highlight a few situations which may need to be considered.

1. VAT

This will be particularly relevant to those who have launched token or digital asset projects. They will likely need to consider if VAT is properly owed or chargeable on that sale, at what rates and where.

2. Corporation tax

Organisations that invest in digital assets as a trading business (whether directly or indirectly) may be obligated to pay corporation tax on taxable profits (including from mining or staking) received from digital assets.

3. Income tax

Individuals will have to consider whether or not their interactions (including trading, mining and staking) give rise to income tax obligations.

4. Capital Gains Tax

Where digital assets are purchased, sold or transferred each transaction (including where tokens are transferred for no value, or are traded for other tokens) gives rise to a potential capital gains tax liability (for both organisations and individuals).

Next steps

This is a constantly developing area and no two situations are the same. HMRC will continue to focus on the recovery of unpaid tax on cryptoassets.

Organisations and individuals will need to ensure that they take specialist advice on their obligations (including whether or not a disclosure should be made) sooner rather than later, in order to mitigate penalties, reduce interest, and avoid reputational damage.