Crypto Tax Sucks: An Introduction to Crypto Tax

This is the first episode of Crypto Recapped our new podcast.

We’re starting off with a four part mini series, "Crypto Tax Sucks", as we approach the UK tax deadline. We'll be joined by a new special guest each episode to explore the world of crypto tax, discuss recent events in the crypto industry and answer your questions.

In our first episode we discuss:

Does HMRC have a role to play in educating people on filing their taxes?
FTX, Celsius and BlockFi - how will this impact the industry?
Taking a long-term view of the market and optimising your tax position
And answer your questions on:
Taxes when cashing out of crypto back into fiat
How to handle taxes for assets locked in FTX, Celcius and other troubled crypto companies
The UK becoming a crypto hub

Watch now:

Useful timestamps:

[2:00] Why does crypto tax suck
[5:43] What does an individual need to do about their crypto taxes
[8:35] Does HMRC have a role in educating people about crypto tax more?
[12:41] Celsius, BlockFi etc…
[16:04] Different approaches we’re seeing to optimise tax position
[18:21] Question: Do I only pay tax when I withdraw crypto into fiat back into my bank account
[23:29] Question: How to handle tax treatment on unaccessible assets on exchanges like FTX/Celsius? Can these be written off?
[29:08] Why Coinpass will not be the next FTX
[33:45] Question: Will the UK become a crypto hub?
[37:50] How are staking rewards taxed?
[45:15] Can I carry back capital losses in the UK?

Transcript

Disclaimer: This podcast is for informational purposes only please speak to a qualified tax professional about your specific circumstances before acting upon any of the information provided

👋 Introductions

Dan: Hello and welcome to episode one of Crypto Tax Sucks. We've called this podcast series Crypto Tax Sucks because let's face it: it really does suck and so we're going to be drilling into some of the basics of cryptocurrency taxes today.

I'm joined by two very special guests and we've got Louise Lane who is associate director at Wright Vigar and I've known Louise now for over four years and I would confidently say that Louise is one of the UK's leading crypto tax accountants.

We've also got Jeff. Jeff is our industry participant today and Jeff is a CEO and co-founder of Coinpass one of the only FCA-regulated crypto asset exchanges in the UK and I'm sure we're going to probably get into some discussion around market events like FTX and Celsius as we as we go into this and Jeff can tell us why Coinpass is different so

Dan: I'm going to jump straight into questions I've got some of them here that I've kind of prepared and we've also got some from the community as well so ahead of this podcast we sent out a Q&A to all of our Recap customers asking you know some common tax problems and it'd be good to get those answered at the end of this podcast episode as well but I'm gonna kick off by asking a simple question to both of you and we'll start off with you with you Louise. Why does crypto tax suck?

💩 Why does crypto tax suck?

Louise: Well, that's a big question. Where do I start!

I would say the biggest reason it sucks is most people invest in or using crypto assets don't realise the quantity of the tax events they're creating so classic example is they put £10k in fiat in, they've done whatever in the crypto sphere the off-ramp for £5k. They think they've made a loss whereas in reality all your transactions are pegged at the market value at the time of of doing them and you might have huge gains and losses. You can't intuitively work out what they are without running them through some kind of tax software like Recap.

Dan: Okay and Jeff, from a customer perspective, do people come to you guys and ask how to account for it or what to do?

Jeff: Yeah the simple answer for that is is export your CSV and send it to your accountant it's kind of because we're not tax specialists we're also not tax advisors but we definitely see a more mature approach to it. Let's say four years ago it was very “does Coinpass send my details to the HMRC” and the answer to that is no you know you're responsible for your own tax positions but I think people are looking at it far more in-depth or seriously than they used to so they're doing the exports they're using software like Recap they're more aware of the capital gains position and trying to use more of those vehicles more appropriately.

I think that's where we've seen a lot of people have their personal account and their say limited company account because they use funds in two different ways from their limiting company to their personal. I think what HMRC have done is probably more of a lack of education and more of a lack of outreach around how these tax positions are handled but I think our customers specifically are taking a more mature approach to and trying to use those gains appropriately.

Dan: That's that's really good to hear I mean one of the main reasons why we started Recap is you know yes we you need to calculate your taxes to to pay your taxes and but as a result of calculating your taxes you then get this kind of wealth planning effect you know what you need to put aside you know how to maybe optimize your tax position at certain times of the year and you you can even plan you know what what your exit value is in the market. You know “what would I pay tax wise if I was to exit everything and buy a house” those are the kind of like nice things that you can get as a result of doing your taxes and like you say I think I think the sophisticated investor understands that and I think there's there's probably a bit of a lag from retail to to come up to that kind of standard and that kind of level of thinking.

Louise I don't know if it's interesting you mentioned a strategy on there because in some cases it might be worth taking a short-term loss to recognise some losses to effectively buy the dip and reset your taxable position for the next year depending on market conditions

Louise: Yeah absolutely yeah but it's you know how do you realize that if you're the average customer who's just using the exchange it's the education piece that you mentioned you know who's telling individuals that they can do that? I mean at the minute who's telling them they need to file a self-assessment tax return?

Dan: Louise can you can you break down like the basics of what an individual needs to do and to get started with their crypto taxes.

Louise: Yeah I would say almost every conversation I have with a new client coming to me is you know you just need to get a handle on every transaction you've ever done in crypto because of the way it's taxed. Most people are subject to capital gains tax it's an investment activity.

The way crypto assets are taxed for capital gains tax purposes is there's this pooling concept where let's say we're just talking about Bitcoin every Bitcoin you've ever bought or acquired as income or mined feeds into the calculation of a disposal. Now because you've got this average cost basis so you can't get your current tax position up to date without addressing every transaction you've ever done in the past across every exchange and every wallet. So it's an aggregation of getting all of that data into some software like Recap working through it and making sure you've dealt with the prior years before you deal with the current year.

📚 Does HMRC have a role to play in educating people on filing their taxes?

Dan: Okay that's a good overview. Just going back to Jeff's point on education you know if I'm you know an individual that has a full-time job and I'm on PAYE what are HMRC doing to inform me that I need to do a self-assessment tax return? Like how is crypto taxes even on my radar?

Louise: Yeah I mean under self-assessment HMRC don't need to tell you you need to tell them so it's up to an individual to work out if there is a need for me to file a tax return this year and you're absolutely right; so many people that I speak to that have got into crypto have never had to do a tax return before. This is all new to them and the onus is to work out do you have something that needs a report to HMRC and for most people historically before crypto it was a no if you've just got a job unless you've sold a property or something like that but now it the onus is on you each and every year to reassess that tax position.

If your gains are over the current capital gains tax-free limit of £12,300 then you've got an obligation to file but even more so if you're already doing a tax return for other reasons. You can't avoid filing if your gains are below that limit where you've actually made disposals worth about £48k it's 4 times the annual exemption so if you're already doing a tax return you can't ignore the crypto tax just because your games are below the £12,300 you still have to disclose that to HMRC and give them all your capital gains tax calcs that's an important point that people get tripped up on.

Dan: Jeff what do you think do you think that HMRC has a bit of a role to play in educating people around filing taxes? You know I kind of see it as maybe it's a bit of the have their cake and eat it at the moment in the sense that you have to pay tax on it but we're not telling you who we're not educating you in the first place.

Jeff: So I think they're definitely doing a better job than the IRS in the US I mean they kind of already know exactly what you owe. You miss a penny you go to jail they're definitely not in that kind of light but they could definitely do more. I know that the the tools are out there for people to discover and people to read but I think the language needs to evolve a little bit more not make tax so to be feared but something to you know like a a vehicle to use to ensure you hang on to the most wealth as possible.

People are putting a lot of time and emphasis on kind of getting into the market and growing as much as possible whether it's investing into liquidity staking, ICO's, ideas it doesn't matter they need to focus on the off-ramping part of it as well the tax exposure and I think you know from a my engineering background, and through financial modelling the number nerdy part of me I actually quite enjoys looking at those kinds of things to try and maximize what I can and can't do in this kind of space.

Without trying to make it kind of the the heebie-jeebie you know Boogeyman in the room HMRC are there to work with people not necessarily to slap them on their wrist yeah the slap the only wrist comes from not divulging five years worth of trading data and then you suddenly get a nasty audit you know that kind of stuff doesn't go away and I think with the the technical improvements HMRC has made around you know stuff with open Banking and payments, I think those those kind of barriers are starting to come down.

I think they need to you know maybe improve the way that they kind of put their content out there in terms of how to tax it, when it's taxed, the type of activities that are included but it is a very fast moving space so they're obviously working as hard as they can to make it as fair as they can but you know a lot of people are just completely unaware that this is even a taxable event they might put it in the same thing as like Forex Trading or spread betting or something like that which is classified as gambling.

Dan: I mean you could kind of argue that you know tax is a good thing because it's showing that crypto is is growing up right? It's turning into its own distinct asset class and you know it doesn't matter what asset class you have you need to pay some kind of tax on it right so it's just a consequence of you know an asset class that barely existed 10 years ago it now is growing up and you know despite you know FTX and other issues that we have at the moment this is quite a well-established asset class that people are generally interested in and therefore tax is just a part of you know being an investor.

Jeff: No I couldn't agree more yeah definitely the more regulation that comes in registrations you know there are a lot of things in the CFD world or in the normal trading world which don't apply to crypto right now I can see those kind of happening you know not only segregation of client funds that kind of stuff but also accountability and transparency doing proper audits of systems you know.

We've had countless conversations at network events and at the bar about how poor some of the reporting on an API level some exchanges offer because it becomes very very tricky to even calculate your open positions let alone you know the balances that are being held so I think there's still a lot of work to be done but I think the more the more people want to get exposure into crypto or use it as a payment service the sector is only going to become more legitimized and more professional as time goes on and I think the tax code will have to kind of recognize that and kind of keep picking up pace I mean

😱 FTX, Celsius and BlockFi - how will this impact the industry?

Dan: I'm interested to hear like just just as a result of like Market events at the moment with like FTX Celsius a block five joined the Chapter 11 bankruptcy process yesterday, do you think this is all gonna have like a a really big cooling effect on the industry where do you see it going?

Jeff: Yeah definitely I thought we were going to come out when we had the first luna shock and then I kind of remember that we had that many events in the last six months I can it's very tricky to even keep up but we've had you know at least got a three or four big almost Black Swan events in a very very short period of time and we all knew this bear market was going to be you know quite a long one with the war going on with inflation everything else these are just four additional events to kind of add to that downward pressure.

I thought back when I did some streaming back in 2018 and 2019 that this is the last time you could buy Bitcoin under 10k I think it could be wrong I don't know but I think the spare bike is definitely going to extend not just to February March April of next year I think it could last yeah the majority of next year so I definitely agree there will be a cooling effect from our customers we're definitely seeing less people exit the market so if people have bought positions in the you know twenty thousand dollar range 18 000 range and above that they're definitely kind of hodling and sitting tight I don't think we're out of capitulation phase just now I think the Market's built up of a lot of hodlers but there are still all new market participants that are seeing it as an opportunity to kind of get in and there are the arm themselves with you know their savings or you know their income capital or whatever it's going to be people with dollar cost averaging it or people are making very large purchases you know 20 30 100 000 pounds we regularly see coming into the platform every other day so I think the long term look at the market was very very cool or very cold but there is still a lot of bullishness even at these kind of price levels people wanted to get in wanted to get exposure and maybe not necessarily want to trade it but make a sizeable location their portfolio

Dan: All more reason to keep on top of your taxes right and all of those people that are making you know Double Down plays right yeah and those Double Down players can turn into double double digit you know tax exposure a year two years five years from now depending on what vehicle you're holding it in one thing that's been really interesting on our kind of more B2B business side is we're seeing a lot of interest from SAS pensions small self-administered schemes that have a very effective tax rate for these kind of assets so while we still see a lot of retail flow we see a lot of people signing up with their limited companies that could be from you know property investors bricklayers law firms doesn't really matter these other more sophisticated vehicles and trusts are starting to want access to this asset class and they wanted to make you know make do we don't like do they want to leverage those tax efficient vehicles in order to get access to it so that's client driven demand that's now filtering onto the business side and there's business P there's business related contacts want to deal with a properly compliant properly regulated you know grown-up Exchange in order to handle that kind of flow because ultimately their brand is going to be on the line

🤓 Taking a long-term view of the market and optimising your tax position

Dan: Interesting so that they're effectively you know your customers are taking a long-term view of the market right you don't you don't choose a suspension unless you're taking a long-term view of the market so I'm interesting to see what you know what what do you kind of see boots on the ground Louise from your side do you see clients you know using their tax information and you know information on their position to then try and plan and move it into tax efficient structures

Louise: Yeah for sure we've got lots of clients who individually have high salaries or you know higher other income but they're so their whole concept of strategy is to to hold off capital appreciation whilst getting a really good yield in the meantime so they know they're they're picking their crypto assets for the yield potential so straight away they're putting those through a limited company an investment company so that they can shelter that income from their personal you know from their personal tax rates which are you know even worse than the worst a few weeks ago or soon to be anyway

Dan: Yeah I mean it it seems like a constant battle at the moment there's something in the media every day around crypto and this negative and who knows where it's going to go yet I think minor capitulation is what what people are saying is probably going to be the next wave of you know the downturn so who knows when we come out of it.

Jeff: We had a couple of our clients move from either selling it to GBP and then moving into usdc and they've made like a 20 gain just sitting in US Dollars versus the pound so I think there's you know the instruments are there to be you know would have taken advantage of but they've got two more taxable events that they have to put on their tax return right so there's plenty of opportunities there but when it comes to the auditing account keeping I think some people are definitely shooting themselves in the foot.

💬 Community Questions "Do I only pay tax when I withdraw something into my bank account?"

Dan: Cool so I'm gonna I'm gonna move on to customer questions now that we've got so we've had over 20 Questions I've done my best to kind of distill them down into the most common ones and I think we'll be surprised by by one of the questions and the first one is this would be a great one for you to answer Louise but it's I only pay tax when I withdraw something into my bank account which is a very frustrating question for me because it's obviously not the case but do you experience this question

Louise: Like so so often it yeah and it's hard because you know I know we've had a really really detailed guidance from HMRC since December 2018 but it's just not filtering through and I think it's probably a byproduct of how easy it is to interact with crypto you know you you just hear about it from your mate you download the app you know all of a sudden you've bought some crypto with Apple pay you don't realize what you're actually getting into I have so many clients who've been doing some really complex staking leveraged activity without even knowing they've done it so I just think it's so difficult to to even appreciate what you've been doing before you even think about the tax consequences of it and I don't really know what the answer is because as much as HMRC can promote it and educate people is anyone going to listen if they're seeing email from HMRC if they see a HMRC podcast or something do they care? You know it's like how how do you reach these people.

Louise: I I guess the the threat of HMRC compliance is possibly a way to do it because from like right up until now HMRC have been very much on an educational type you know let's just try and get this right kind of thing but we know from the things that are coming in with the CARF and there's going to be all sorts of legislation and regulation that comes in that kind of means that all the information about your crypto activity through exchanges is going to land on HMRC's desk they're not going to have to ask anyone for it and this is worldwide so there's going to come a point where HMRC have all the information they need to start targeting taxpayers and I guess that's what's going to really motivate people to understand the tax positions and make sure they're getting ahead of it because it's much better if you get on top of your taxes now voluntary declare your back years and you're in a good position going forward because if they come to you before you go to them then you're looking at a minimum of 15% penality on top of the tax and interest that's due ouch yeah like minimum you know it's probably going to be more than that to be honest.

Dan: Yeah I mean my philosophy on this is I want to sleep at night I don't want a brown letter dropping on my doorstep because every time I do get one you know get a little bit nervous. Is it related to my company or is it related to me individually?

Jeff: Yes oh you have to peel open the wrapper is it oh no or it's just a reminder it's okay nothing fine reminders are fine yeah

Louise: I think it's using the Assets in the real as well if you want to offer amp if you the solicitor wants to verify source of funds you know a prerequisite of using the money in the real world is you know making sure your taxes are in order.

Jeff: So I had the same thing about that where I've had to kind of re-save for a deposit because a lot of my gains were going to go into a property and even if I'd done the sorts of funds it's from an FCA registered exchange irrelevant that I'm the CEO of the exchange. The fact that there was any form of gains from crypto were just not going to be accepted for any any sorts of funds regardless how many times it was either audited or verified or Etc and that was the solicitor talking not the bank or the lender or anyone else so that was a really interesting bit. All the people that are doing a lot of hard work to to build up their Capital through crypto could could all be for nothing depending on what the climate of crypto is to go into real world assets that's just my own personal experience from about 12 months ago.

Louise: I would say we have had clients who who've got past the solicitors checks with source of funds so you know maybe it's picking the right solicitor maybe it's you know the evidence and the assurances we can give you know certainly that we're interested in Recap reports in the trail of the history of how the you know the funds are built up from just a mere £5,000 in savings you know you can trace it right through to see you know how you've grown to the asset value you have now.

💬 "How to handle taxes for assets locked in FTX, Celcius and other troubled crypto companies?"

Dan: Cool thank you for that I'm going to move on to the next question which is the one that we've seen in the media quite a lot which is all surrounding FTX and how do we handle the tax treatment of assets that are stuck or lost on FTX is there any way to write them off? What what can be done for for people that are trapped in this situation? And just just for reference I was I was speaking to somebody yesterday who should remain unnamed but he suggested they were there were eighty thousand UK customers on FTX as an absolute minimum and we now have Celsius, BlockFi, Voyager so there's potentially over a hundred thousand UK individuals that now have assets that are trapped on these platforms.

Jeff: Not to mentioned Genesis and Gemini have added not not the default list but in the blocked withdrawal list as well so that number could easily be three or four times that.

Dan: Yeah I mean it's quite a dire situation right for especially if you need to pay a tax bill you know maybe you need to draw down those funds to pay a tax bill you know what do you do?

Louise: It's a really hard question because well first of all let's take FTX we don't know the exact terms and conditions that were in place when you interacted with them you know did you just deposit did you you know pledge some tokens in a staking protocol or what did you do? Each of them have their own terms of service and what we found is over the last sort of six to eight months all the exchanges have been changing the terms of service anyway in reaction to HMRC guidance and so you kind of need to know what were the terms of service at the time you interacted and we really need to see how the Chapter 11 proceedings play out because it's probably a bit too soon to make a claim which is not ideal if you've done loads of activity and have no product of that activity and you're thinking well I really don't want to pay tax on that or I don't really want to pay tax until I know whether I'm going to get any losses but we're just in a real position at the moment where it really does depend on the circumstances.

_Dan: Yeah and I think for for FTX like we could probably it might be too early to say it but I'm going to say it anyway but we're pretty much dealing with fraud right we're dealing with massive misappropriation of customer funds and generally.

Jeff: Customer funds and investor funds and that's where the kind of the the items kind of going there's a big emphasis on on the cluster funds but I mean the VC money that went in was also misappropriated so you've got this giant black hole and now you've got different jurisdictions fighting each other who can get their bankruptcy proceeding through first and who takes preference

Dan: Yeah I think I think I've read this is going to be one of the largest bankruptcy cases in in history it could be a decade.

Jeff: The insolvency practitioners the same guy that did Enron and he goes “it's way worse than that” it's worse than Enron and there are like that that as a business case it's taught in like Business Schools of kind of you know the textbook what not to do so you know we could be redefining the worst insolvency practice in history as we speak so I mean I'm not sure what you're doing your weekends down but I'm glued to Twitter spaces well WhatsApp chats telegram and discords at the moment just trying to absorb all the information's out there and I don't I think it's going to take some time to even see the bottom of the hole before we can even talk about you know what happens next to those customer assets because they're most likely just gone

Dan: Yeah yeah and if they are gone the question is can users write them off I suppose is what what we want and I suppose that that could be possible depending on the circumstances yeah I think if you read HMRC's guidance if funds are stolen or if there is fraud then it is it can be difficult to to claim that those assets are of negligible. Im I right you thinking that Louise?

Louise: Yeah and like especially with the negligible value claim let's say you have Bitcoin on there but you still hold Bitcoin elsewhere you can only make a negligible value claim for the whole pool and you know it's just your Bitcoin with FTX that have gone not the rest of the Bitcoin and Bitcoin in itself isn't of negligible value which is the grounds with which you make a negligible value claim so yeah it's a really tough one and certainly we're going to be working with CryptoUK to try and Lobby HMRC for some answers because people need clarity don't they?

Dan: They do yeah.

Jeff: I suppose it's also open to potential fraud where it says oh yeah I lost X amount of Bitcoin and providing very kind of sketchy proof while a platform that's kind of down and out it's kind of impossible to substantiate you know we saw a huge amount of fraud around the bounce back scheme and stuff like that and that was a government-backed, government-backed scheme for after COVID something of like “oh my five Bitcoins gone can I have a you know a capital loss exemption please” I think we'll start to see you know people trying to for lack of a better term sorry to sell your podcast take the piss on a platform or a you know a Black Swan event of this size to potentially get out of future gains or get an exemption up front so it's a very very tricky position and it's it's not one that's going to be easily taken by either side of the market regardless what happens.

Dan: Completely agree with that I mean this is never going to happen at Coinpass right?

Jeff: Oh we'll never say never obviously. No I, like you Dan, I also like sleeping I like being not stressed I like being able to share my face in public and yeah we have very strict controls that we work within with the FCA and I think it comes down about team we get kind of asked at time and time again how how do we a smaller firm in the the greater crypto space managed to get this big bulky FCA license that a lot of people have failed failed on and a lot of people have had to move move their business offshore huge custodians you know massive market makers yet we're able to get it done and I think it comes down to our team I'm from a corporate background casinos highly regulated data center super secure and hedge funds that are you know layered with so many little Chinese firewalls of information it's very hard to do business but you know from our COO's perspective he's done 24 years in regulation and compliance and electronic trading he's dealt with the FCA many times before he has his own personal brand to deal with when working with the FCA let alone on crypto our CTO worked in a Merlin, Sony, oil and gas he's got his own brand to work with in terms of being in a regulated crypto space so the way that we deal with our customer funds the way that we deal with our reconciliation we've been pretending that we've been FCA registered or regulated whatever term you'd like to use since we launched in 2018 and there was no framework for the FCA to work on so we've never had to re-comply a user we've always kept our accounts segregated purely from an accounting standpoint because it'd be an absolute nightmare and we pay we pay quite a lot of money for our bank accounts you know before we take a single deposit or a single transaction every month our banking infrastructure costs us like north of five grand just to have a client facing receiving bank account for those funds we invest heavily into our custody infrastructure which is why we work with some of the the global leaders like Fireblocks so we can keep everything segregated and secured and policied so when we have to do an audit or we we have to you know in in a Black Swan event shut the business down we run a very simple spot one-to-one every pound that comes into platform comes to its own place every bit of crypto for all of our customer deposits go to segregated individual places and it's on my team and obviously on me to ensure that that happens you know securely and and handled with great care because you know ultimately it's going to be my my head on the my head in the noose if it all goes wrong and I defer back to my original point I also like sleep.

Dan: You like sleep and you don't like prison

Jeff: Yeah yeah well I've never been to prison but I can't imagine it's that much fun even for the white collar guys and I think you can have a very successful very scalable business without having to you know misappropriate these funds. If we go back to the original FTX example they were taking user funds along them to their own hedge fund sorry hedge fund their own quant fund to go trade the crap out of these but you know the more we learn about this is that they had no no risk controls no no liquidation thresholds set on any of their accounts so they're all able to run their you know 100x shorts with client funds well into the red there might have been a thousand two thousand three thousand percent down and were never liquidated so it's it's it's less about crypto and it's more about fraud when we talk about FTX the you know I think just down to one of the some of the questions we had with the FCA of like yo do you have enough team to look after this like yeah we have tech we have this we have this but they were even asking you know we're a small firm of when we first applied in 2012 we had 15 maybe 18 staff and our CTO was performing two functions which they weren't that they weren't unhappy about it but they're like okay you're gonna need to resolve that eventually how about some of that FTX and Alameda where they had the same person as the re as a risk officer for two different companies that only had two years of experience from all places Credit Swiss not great the regulator would have stopped a lot of those kind of things happened if they were you know more in line with what we've got in in the UK having the same person being the CFO and the Chief Security Officer probably not a great idea so I think I think regulation in those kind of cases would have definitely helped and I think that's why we're able to stand out in this kind of market and not have any of those kind of internal control issues.

🏙️ Can the UK become a crypto hub?

Dan: Yeah I mean in April there was an announcement from the government right that they had this ambition for the UK to become a “Crypto Hub” and which kind of you know goes in the face against the struggles that crypto exchanges have had in becoming regulators and doing business here in the first place is this the UK's opportunity you know to showcase that regulation is a key issue in in this market and that the UK can be be the home of all of these highly regulated businesses?

Jeff: I think it can but the bar is already quite high and I think the bar is only going to go higher you know when they start bringing in like you know proof of segregated funds, proof of proof of reserve you know they may put some legislation there that the exchange can also not be the custodian, something we're already thinking about, I think those are only going to raise the bar higher and then it's just going to do the same thing that financial promotions did and the ban on derivatives it's just going to move more of that offshore.

Jeff: This is why you have 80 000 affected you know FTX users so I think there's a clear opportunity to not make it lacks but make it you know maybe tear it if you're a wallet provider or a custodian here's a you know here's is a level you can operate at within the FCA if you're in exchange or a staking app or something with trading here's a slightly higher level one and if you want to offer you know banking services and Etc that might fit more into the EMI scheme so I think definitely an opportunity but I think to get more people inside they should move move away from the word crypto maybe called DLT so call it a DLT Hub not a crypto Hub because crypto and DLT while they're similar they're two completely different things and I think there's probably more advantageous stuff that the UK could do that's dlt-based rather than crypto cool

Dan: Louise I don't think have you got any any views on you know is this is this the UK's opportunity to kind of clear up the market sort that the regulatory log Jam and perhaps we can be you know maybe we can get some of our competitive advantage back of becoming a Crypto Asset Hub

Louise: Yeah I find it so frustrating there's so many entrepreneurs that are developing web 3 businesses and they want their UK based they've got no inclination to travel offshore and they've been forced you know themselves and their business is forced offshore and we could have all of this in the UK and we we really do just need to support it more and you know it regular I I believe regulatory is the key to supporting it but then the tax is going to follow for that we you know we're working with crypto UK to try and develop bespoke tax legislation but we know with the recent governmental changes that it's just so far off the agenda and it's quite demoralizing because the current tax law isn't fit for purpose at all and we're just trying to work with what we've got and it's just super frustrating that we can't just rewrite the rule book quickly

Jeff: We do have Rishi and he is a Crypto Bro so you know positive in a hope you know we can hope something better comes out of it he's spoken at a fair few events that I've been at as well and he generally has a a positive demeanor towards it which is good so if we can start from that and hopefully let it trickle down it just comes down to you know the constituents that keep the the MPs there you know they have to represent who they're representing so this is why this kind of stuff takes such a long time but you know we can only hope that with the with the PM on our side our side that good things can happen but I think it's going to be a slow old process than the next bull run.

Dan: I'm really looking forward to the Royal Mint issuing their their NFT that Rishi promised last year

Jeff: Haha yeah, that’s not going to happen. We’ll sort the budget, we’ll put an NTF on OpenSea and it will be great

Dan: That’s how you plug the hole!

Jeff: \[Laughing] Oh no

💬 Tax on staking rewards that are only redeemable if you pay a transaction fee

Dan: I'm going to move on to one more question actually we've got two more so the first one is staking rewards so

Dan: If you have some staking rewards that are only redeemable if you pay a transaction fee does that defer the taxation on earnings until they are received does that kind of make sense Louise?

Louise: Yeah I'm guessing that one's for me yeah so there isn't an awful lot of guidance on when this kind of income would be receivable if we're talking staking rewards most likely it's an income reward most likely it's treated as miscellaneous income and I guess the most like there is no guidance on it but looking at first principles of how these kind of things are taxed you would expect that no one would be surprised to know that if it's if it hits your wallet it's taxable for sure yeah but it may be taxable at an earlier point and what HMRC says if it's credited to an account that you're free to draw on then it's taxable at that earlier point so let's say your staking rewards are racking up the recruiting and you can actually draw down them on them at any point by paying a transaction fee I would say that they're readily available and they fall to be taxable at the time they're credited and the fact that you've got to actually pay a transaction fee to withdraw it it doesn't mean you can't withdraw it I would say you know the kind of situation where you can't withdraw it is if there's some kind of lockup you know locked token where it's credited but you can't withdraw for say 12 months or whatever if you physically can't get to it then yes not taxable until you receive it but for sure if you if you could withdraw it by paying the fee I would say that's taxable as it's credited.

Jeff: That's interesting so we're about to launch staking probably January next year and the way the FCA kind of seems staking in UK the way that we're sitting under our license is that it's about fixed outcomes so how long was it locked for what's the rate of return as soon as it gets the variable you're into loaning and EMI and payments and it's just a bit of a nightmare so we're kind of not redesigning but putting a little bit more nuance around the product around a stake and unstake but we pay all the gas right so if you want to early withdraw it's fine you push the on the stake button that capital is re-credited to your account a day later but we're doing all of the gas operations in the background so there's no actual gas fee if you take it early you just don't get you know let's say it's day three of seven then you won't get the three previous days because you haven't done the lock-in period so with that kind of in mind how would that line up with what you just said around staking rewards and paying a fee to get out.

Louise: I would say as soon as you you pressed on stake whatever rewards accredited to you at that point whether you pull them off or not

Jeff: Yep that's the that's the event. Yeah cool okay that'd be interesting .

Louise: I mean I I do need heavy heavily caveat this with you know there is absolutely no guidance on it and this is purely based on first principles and how we think HMRC might interpret it.

Jeff: Sure yeah so the idea around the product we're building is you'd have a a subscribe so I can auto roll over so let's say you stake 100 DOT today and then a week later I'm just making up the maths here in my head it's not the offering don't come back. Let's say that the following week it's like you have 101 DOT and because you're automatically restaking it the one dot would be credited to your account and then put straight back into the staking pool and then you'd be staking 101 and then 100 250 and then it's supposed to be a a way to kind of huddle dollar cost average and kind of automatically stake week on week and we might build some 30-day plans some three month ones Etc but you're still able to unstake at any point they're not completely locked and keeping people away from their funds and handcuffing people the last thing we wanted to build is a product that was going to handcuff people but it's interesting around that point at the point is re-credited that's the taxable event versus when it's unstaked so maybe with that in mind we'll have a bit of an idea on the tax bit if you put 100 DOT in at the point you unstake is when your actual taxable event takes place so that might be that might be something we put into into effect. Because the people are going to stay for a year why should they have taxable events every single month leading up to that so

Dan: Yeah this this is where like staking rewards can can really screw you over as well if you if you don't treat staking as as almost like almost like running a business so if you receive some staking rewards you need to pay income on those rewards so you need to value those transactions in pounds and if people aren't putting money aside and the market drops then you might need to sell some of your crypto to then pay your tax bill or you might not have enough crypto so

Jeff: Like a nasty VAT bill the end of the year oh yeah I've never had one of those I have when I was a consultant oh really that much wow

Dan: Yeah I mean it's that's what you get when you run a business right and again it comes down to individuals that participate to participating in these products that don't necessarily plan for these events and you know effectively they go in they're going long crypto by not putting money aside in the hope that the market is gonna keep rallying rather than putting money to one side and having the comfort that they can actually pay their tax bill. Do you see a lot of this Louise?

Louise: Well we've got people made crazy high gains in the 21-22 tax year ending 5th of April 22 their tax is due in January and you know genuinely some clients that just don't have the crypto left because they didn't set aside fiat in their bank account to pay the tax and the value of the crypto is less than their tax bill and it's just it's just really hard to imagine HMRC having much sympathy for that because you know you didn't know the market was going to crash when you you know at the time you received the income for example it's taxable at the time you receive it based on the value you receive it so their expectation is that at that point in time you set aside the tax that you know you're going to have to pay regardless of any subsequent drop in value of those tokens I think the best we can maybe hope for is some kind of leniency on time to pay your bill instead of having to pay it all in one.

Jeff: I sounds like the old adage of when a property investor builds a very large portfolio bought a whole bunch of terraces at £20k they're all now worth £150k each there's 20 or 30 of them they pass on and then suddenly there's a million pound inheritance tax bill you have to liquidate literally the entire portfolio just to pay the bill so there's a lifetime of someone's work just gone and it's kind of reminiscing like it's been in a much shorter time frame

💬 Can you carry back capital losses?

Dan: Yeah absolutely yeah so we're gonna get on to the final question now and I think a lot of people are going to be asking this question you know we've just had a bull to bear Market cycle so lots of gains being created followed by potentially lots of losses and people are asking if there are any mechanisms to carry back losses in the UK I'm pretty sure the answer is no

Jeff: Damn it

Louise: \[Laughing] No, It’s just plain and simple, no.

Louise: Now you operate in a tax year so if you haven't finished the tax year any loss you make up to the 5th of April of the tax year can be or it will be automatically offset against any gains in the same tax year however once you've ticked over 5th of April no subsequent losses can be carried back to the any prior tax year once you make a loss in a tax year let's say overall in the 21-22 tax year you've got a £50k loss then that can be carried forward indefinitely against any future gains you make but can never be carried back to a prior year and and also a big problem we've got is people with you know high income tax based on you know staking rewards and then in the same year they've maybe got a capital loss from trading activity and the two can't be offset either you can't use that capital loss to offset your income tax on the staking rewards unfortunately.

Jeff: Yeah no they're isolated baskets but does that also have to be done you have to file it in that year appropriately as well so if you miss a year filing it oh I should have filed this last year does that mean it's it's kind of gone

Louise: You've got four years yeah four years

Jeff: Okay cool so there's a crypto loss you hadn't filed in 2018 you can refile 2018 with that loss and then carry it forward anyway?

Louise: I'll have to get my fingers out to check the years we're on we're on it's it's four years up to the 5th April.

Jeff: Some of those losses might be on exchanges that don't exist anymore so for sure yeah I have a I have a calendar entry it's the worst day of the month I log on to every platform and get every single statement you know whether it's a platform I use or a bank account or you know my spare Monzo account that I rarely use I go and get a statement from every single one of them every month it's the most boring admin task but it's for this very for this very simple reason for tax purposes and business purposes and keeping track of all of my capital in various pots and various portfolios it it pays to do your admin

Louise: It really does it's so important we've seen this with FTX already you know the API is down we're hoping at some point it might come back up and luckily I would say if you've already got your FTX free your API within Recap then all those transactions are stored aren't they Dan?

Jeff: the only kind of problem with that is a rumor that there's like big chunks of the FTX database have been deleted so even if the API does come back out there might not be any data to retrieve yeah this miscellaneous accounting back door that the CEO had I I don't do Accounting in our business simple because it's not my strong suit and B I shouldn't do it but the fact that that access was there for Sam is just like mind-bogglingly scary

Close

Dan: Yeah I think we can we can kind of summarize that crypto tax sucks because of record keeping and exchanges kind of going under every five seconds is probably one of the reasons second to that is probably the volatility in the market you know it's going to kill your staking positions and then the timing of your tax returns for carrying losses is probably like the third factor. \[Laughing] so unless you're on top of all of those things you're screwed basically and we summing this podcast up with like a really big negative at the end that everyone's screwed.

Jeff: \[Laughing] Crypto tax sucks and don't do crypto thank you signing off. No but I mean on top of that I think there's still you know the positivity of people going into this space is still very very large you keep on top of that stuff yeah you can still make games the fact that you can you know buy an asset and move it to any venue on earth and trade it or do payments with it or or ecats and some some extra yield that you would not get in other markets while the rest of the world's getting clobbered I still think there's a lot of reasons to be in crypto so I think all these kind of things right now will come out in the wash I think they're short-term problems in the grand scheme of things if we're talking about this low point in the market in year 12 of the market existing and two three four five years from now we have a positive tax code we have better regulation we have better compliance we have better segregation of funds better protection for users, that's a lot of work and a very very short amount of time to mature as a market so this is just kind of the the cost of being on the bleeding edge of of fintech and financial so you know I think a lot of people are cool with that

Crypto Tax Sucks: E01 An Introduction to Crypto Tax