UK's Unforgiving Hunt for Unpaid Crypto Taxes: Experts Speak

• UK Government Advises Voluntary Reporting of Unpaid Crypto Taxes
• Crackdown on Unpaid Crypto Taxes
• Consequences of Non-Disclosure
• Tracing Unpaid Taxes
• Assessing Unpaid Taxes
• The Ignorance Pitfall

UK Government Advises Voluntary Reporting of Unpaid Crypto Taxes

The United Kingdom's government issued advisories on Wednesday encouraging crypto users to voluntarily disclose unpaid taxes, aiming to avoid penalties. A recent 2022 survey indicated that 72% of the country's crypto owners have not consulted the government's crypto tax guidance. Regardless, a lack of knowledge will not be considered a justifiable reason for tax evasion, according to experts.

Crackdown on Unpaid Crypto Taxes

Regulatory authorities could implement a variety of strategies to locate unreported crypto, such as utilizing whistleblower information and creditor lists from recent bankruptcy proceedings, say tax advisors. Investors may be unaware of their tax obligations, but this ignorance will not serve as a valid excuse. The government has the ability to use several methods to identify non-taxpayers or those concealing their crypto assets, explains David Lesperance, founder of tax advisory firm Lesperance and Associates.

In a recent call to action, the Treasury encouraged crypto investors to independently calculate and disclose any unpaid income or capital gains taxes. These disclosure requirements apply to exchange tokens like Bitcoin$42,260 -0.64% (BTC), non-fungible tokens (NFTs), and utility tokens. Some traders might not have realized that their NFT transactions could yield taxable events or even read the guide, according to Dion Seymour, crypto and digital asset technical director at tax firm Andersen.

Consequences of Non-Disclosure

If crypto holders fail to determine their tax liabilities and do not proactively report, it could exacerbate their situation. The Treasury will say, okay, if you're going to make us look for you, it's gonna cost you, warns Lesperance.

Tracing Unpaid Taxes

There are several ways the government can identify those who have not paid their crypto taxes. For example, if an investor has funds in collapsed crypto companies like FTX$3.28 -5.38% exchange or lending platform Celsius, they could potentially be named as a creditor during bankruptcy proceedings. The Treasury can check these funds against tax returns, adds Lesperance. Furthermore, the government can rely on whistleblowers who know about your crypto investments.

However, the Treasury might need to invest in additional resources and employ companies like Palantir to aid in these investigations. The U.K. recently embraced new international standards for crypto tax data sharing between authorities, developed by the Organization for Economic Cooperation and Development (OECD). This translates to much more information being funnelled to the Treasury than people previously would have anticipated, Seymour notes.

Assessing Unpaid Taxes

If investors took "reasonable care" when declaring their taxes, they may have to pay what is owed in unpaid taxes to the government for a maximum of three years preceding the current tax year. Seymour explains, If you took reasonable care, read the guidance and misunderstood it, but then sought advice from a tax consultant, you might be in the clear.

If investors did not make an effort to accurately report their taxes, then they might have to pay up for a maximum of six years. Those who intentionally evaded taxes or purposely reported incorrect figures may be liable for up to 20 years' worth of tax on their crypto assets.

Failure to contact the Treasury could result in additional interest and penalties, but these can be minimized if any errors are reported. Investors could face penalties ranging from 30% to 100% of the extra tax due for intentionally hiding crypto assets from the government.

The Ignorance Pitfall

Many individuals may not know how much crypto tax they owe. A government survey conducted in 2022 indicated that about 72% of former and current crypto owners had not read the Treasury's crypto tax guide. Furthermore, The taxation of crypto isn't necessarily as straightforward or intuitive as some people may like, states Seymour.

It may not always be apparent when taxable events are being created. For instance, purchasing an NFT using a cryptocurrency like Ether (ETH) can be a taxable event. Similarly, purchasing crypto with other crypto also can be a taxable event. According to Seymour, If investors have used software or stayed on top of it as they've gone through the process, then it won't necessarily be too bad, but if they haven't, then it can actually be a difficult process for them to calculate everything.

Edited by Jonathan Stoker