Oct 31
Does HMRC think the crypto tax bubble has burst?
Sarah Saunders
Personal Tax Manager
RSM, London
Personal Tax Manager
RSM, London
Does HMRC think the crypto tax bubble has burst?
HMRC recently published its latest ‘tax under consideration’ figures for wealthy individuals and mid-sized businesses. These are an estimate of how much additional tax could be raised in cases that HMRC has started to look at for this group of taxpayers, prior to a full investigation of the specific facts or the applicable law.
It can provide a rough snapshot of the areas HMRC has been looking at to generate extra revenues from. Generally, the estimates of tax underpaid in the various areas of investigation of wealthy individuals and mid-sized businesses has increased from the year to 31 March 2022 to 31 March 2023. For example, the estimated potential revenue for cases relating to land and property have increased from around £105m in the year to 31 March 2022 to around £150m in the year to 31 March 2023.
There is one notable exception to this which is in relation to the estimated figures relating to crypto. In the figures for the year to 31 March 2022, the estimated potential tax for cryptocurrency was £2,277,465, but for the year to 31 March 2023, it is merely £234,046. It might be assumed that crypto is now regarded by HMRC as a very low risk area, or otherwise not warranting significant levels of investigation, but is this logical?
In November 2021, Bitcoin reached a record high of $68,789. This may well have generated a cashing out of profits at considerable gains which then would have produced material tax liabilities. It is logical that the 2021/22 tax year might be a high water point for the level of potential crypto tax revenues. The tax returns for the 2021/22 tax year were due for submission on 31 January 2023 and so could be subject to early investigations.
Given the volatility of cryptocurrencies, even an asset in a year where overall movement was minimal may have generated a large gain in a surge. Memecoins for instance tend to have a period of fierce rises, where substantial profits may be made, before the markets ease.
The FCA believes there are 4.97 million UK crypto investors. Anecdotally many of these, especially at the lower end of the market are unaware of their tax responsibilities.
In 2022 in the US, 97% of respondents to a survey which presented situations in which cryptocurrency could be taxed got at least one question wrong. In the UK, where most taxpayers are used to taxation being handled by HMRC with minimal input by them, it is quite possible that the lack of knowledge is wider.
In 2024-25 tax returns, there will be extra boxes to report cryptocurrency transactions separately. That is presumably intended to help make it easier for HMRC inspectors to identify and investigate those with crypto affairs. So, whilst there has been a sudden decline in the estimated tax revenues in this area, perhaps this is the calm before the storm as HMRC get its house in order.
Cryptocurrencies are here to stay. They are volatile and can generate large gains. They are often popular with people with little understanding of tax, and their taxation is complex and ill understood. HMRC will surely keep a close eye on this potential source of revenue but figures like this year’s may lure taxpayers into a false sense of security that HMRC is not focusing on this area.
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It goes without saying that various factors affect the materiality of core issues, though the fundamental starting point is to understand one’s individual motives for sustainability, then aligning them with stakeholder needs. These stakeholders will be affected by the impact of high-level investment decisions.To assist the harmonisation of material issues, leading to the development of different sustainable investment strategies, the available basic frameworks overarching the ESG concept include the GIIN IRIS,UN SDGs, the UN Impact Radar, and the UN Principles of Responsible Investment. These frameworks and others help to define similar underlying characteristics or themes of potential investment issues.
After defining materiality, an individual investor, or a trust can invest from a thematic based view.Instances include generalized climate adaptation focused investing, climate mitigation investing, healthcare investing, education. Deeper than this is bringing together best in class projects or geographies.Moreover, an investor can also zero into more specific issues, companies or projects, where one seestheir most sought-after impact goals being realised, as well as understanding the specific core metrics defining successful impact, beyond the financial returns. For example, plant seed banking, smart agriculture, student accommodation, water supply and sanitation, microfinance, household or utilityscale solar energy, as well as specific geographies of interest. The list is endless and is informed by an individual’s specific needs, anchored on sound stakeholder engagement, hence materiality.
However, it is also very imperative to realise that at times, there is an urge to overstate impact, due to personal biases. This is the detrimental case of greenwashing or impact washing and must be avoided at all costs. Moreover, there are also tendencies to underestimate the potential positive impacts brought about by some investment. Through collective materiality assessments, these biases can be identified, and true impact can be analysed. Hence, when making collective investment decisions, for example as family trusts or corporates, it is key to meet at a common place, where collective material issues are brought together, establishing consensus and harnessing collective efforts for greater, more meaningful impact through sustainable finance and investment.