- Does crypto tax suck?
- Compliance and crypto tax rules
- HMRCs approach to crypto investigations
- The incoming Crypto Asset Reporting Framework (CARF)
- Changes to capital gains allowances and what this means for crypto
Watch Crypto Tax Sucks Ep04: UK Crypto Tax Compliance with Dion Seymour
[01:38] How Dion got started in crypto
[06:08] How do you feel about crypto as a technology? Bull or bear?
[11:20] Tax laws and changing them for the better
[15:14] Guidance is HMRC's understanding of the law
[20:00] Regulating in a fast-paced industry and further guidance
[22:23] Dion's blog: What to do if you get an HMRC crypto investigation?
[33:40] Should HMRC be recommending crypto tax software?
[39:00] Crypto Asset Reporting Framework (CARF)
[45:07] Three main misconceptions about crypto tax
[57:20] Capital gains allowances are reducing
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
👋 Introduction - how did Dion get started in the industry?
Dan: Hello and welcome to episode 4 of crypto tax sucks. I can't imagine having a better guest on than who we've got today - so we've got Dion Seymour, who is Digital Asset Technical Director at Anderson in the UK, and Dion also previously worked at HMRC as Policy and Product Owner for cryptoassets. It'd be great to hear a little bit about your story in crypto and how you got started in the industry.
Dion:I'm afraid to say I actually spent nearly 18 years in HMRC and I did a quite a variety of roles but, with that one it all comes down to, like most things in HMRC, availability! So, I joined the team that had oversight of cryptoassets, and as I didn't have a full case load at that particular point in time, they also made me take up the role of the Brexit Co-ordinator. I got the Brexit Co-ordination role because I was the only person in on one Friday afternoon and they're looking for someone to take the responsibility for aspects that need to be done on Monday. Yeah, so then, a month later I'm in on a Friday afternoon and the previous incumbent had decided to leave the team and I ended up getting the crypto lead on that. I did have some understanding of Bitcoin beforehand. I'd been loosely involved in some of the discussions particularly around “is it money”. And so, it did make me a bit more of a natural fit for the role. I was pretty much the only person in HMRC working full time on crypto. There are other people who do aspects of crypto, but they will have other elements to their work as well. Which then also meant that as the industry developed, I was firmly involved discussing with people “What does this actually mean?” As much as you may or may not like the HMRC guidance that was, I still think, one of the most detailed that's been released by any Tax Administration, but when we put out the policy papers 2018, 2019; the manual in 2021; the update with the DeFi section in 2022; we're still touching topics that no other Tax Administration has wanted to touch. So, whether you like DeFi or not, the fact that we've actually come out with a position gives it at least some certainty. I think HMRC has been one of the most forward tax administrations in the world on crypto.
🐂 Are you a crypto bull or bear? How do you feel about crypto as a technology?
Dan: Thanks for your story. You’re now much entrenched in the industry and I'd like to get your perspective, now outside of HMRC, working for an accountancy firm. I know HMRC has to remain neutral, but yourself - are you a crypto bull, bear? How do you feel about crypto as a technology?
Dion: My position on crypto, does surprise some people, I do own crypto. I invested in crypto way back in early 2017. But I'm much more neutral about crypto. I wouldn't necessarily say I'm bullish, it's gonna develop and take over the world, it really has evolved and changed remarkably over the years and it's really interesting, really exciting to be involved in a lot of those projects and those topics. And you can see how it can take over, but, I've often been a bit more tempered because I've obviously seen how it can also fail. Not everything that we've seen with crypto has taken off, not all of it has been a great innovation, so in that sense I think sometimes you just have to be a bit more “Okay, what does this actually mean? How does it actually improve? What does it actually do?” But that also helped a lot when I was in HMRC, some people were saying “Why don't we just ban it? Can’t we just get rid of this? The only people who use this is criminals.” A lot of people thought me as being crypto positive because I would point out actually criminals can use a whole host of different ways to circumvent laws, not just crypto, and to say that the technology in itself is criminal, because criminals use it, is definitely not the correct approach. Offshore bank accounts can be used in the same way, doesn't mean that everyone who has them is actually doing no good. It comes down to the fact that how some people use the technology shouldn't be indicative about people's perception of it.
💩 Does crypto tax suck?
Dan: Cool. Yes some good points there. I'm really keen to ask you, it's what I ask all of the accountants and tax advisors on here is - do you think crypto tax sucks? Particularly from a UK perspective. You mentioned that the UK are probably world leading in terms of guidance. I for one was thankful for that as it's critical that we've got a good understanding of how things should work from a tax perspective for our software. It was great to understand that a lot of our early understanding aligned with the guidance as well. There is DeFi guidance out there now, a lot of people have a very negative opinion of that but it does allow for us to maybe engage with HMRC, we've certainly done that through Crypto UK, in terms that, it'd be great to have some change, maybe some parity with other financial products or asset classes that have carveouts, and we've got that opportunity because we have that clarity. So, do you think crypto tax sucks or do you think we're in quite a good position?
Dion: Um… does anyone like tax? Maybe the first question before we worry about crypto tax - not that there's such a thing as crypto tax. I always love when people talk about crypto tax, it's just tax. Personally speaking, I like tax, but I like it for the fact that it's what helps our schools, our hospitals, our general society operate. I think there is a place for tax to exist. Now, whether crypto should be taxed or not, I think it should have parity with other asset classes and what you're actually looking at here is, it is being treated in this very much the same way as many of the other asset classes. Perhaps it's being treated closer to shares and it's clearly not a security in that regard. All cryptoassets have got very different attributes, it is just that whole umbrella term that's used. Now, how that then implements through legislation is really tricky and the approach taken, which in my mind the most sensible, was to apply existing tax law. Now unlike people's comments that HMRC’s guidance created the DeFi law; HMRC's guidance cannot and does not create the law, Parliament creates law. They put it into the statute books; if it's not in there it's not law. So what we're actually looking at with the implementation/publication of the DeFi guidance, is how tax law is implemented based on what exists. People often say “How do you tax something that's not regulated?” Well, it doesn't need to be regulated to be taxed, it will exist in that framework regardless. So the guidance was there to give clarity, as to what HMRC's view of it was. You know even if you took that guidance away, it wouldn't actually change the position of the view of the law. In some senses it was definitely not seen as a positive aspect putting the guidance out there, but the other outcome would have been not telling anyone, letting them be investigated. Just because it's not in HMRC guidance doesn't mean it's not in the law. So what you would have had, is your customers who file their tax returns not necessarily realise they're getting it wrong. It doesn't matter if it's in the guidance or not, it still would be the law. And this is where I felt people kind of missed the point… Putting the guidance out there should have been almost seen as a positive because it's actually a jurisdiction that has come out and said in detail what the position was. Norway were the first Tax Administration to actually get guidance out there and they have a very similar view and other tax administrations around the world also have very similar views to HMRC but people didn't want to say it. And to come back to your point about trying to engage with HMRC. If we hadn’t put a position out people wouldn't necessarily have known what the view is and that provides the point where you can actually have the conversation - if this doesn't work for the society in which it is intended for, what can we do to improve it. Then that can possibly be worked under what's called a measure into legislation and get put to Parliament whether they pass it or not becomes another matter, but at least you start that discourse rather than HMRC just saying we will come back to you on that as other jursdictions have. That part sucks.
Dan: Yeah. Could we say that guidance is effectively HMRC's understanding of the law? They're trying to simplify things, to create some kind of abstraction that's easy to understand? That Anybody can pick up and start to understand their view on it.
Dion: That's fundamentally the approach with the guidance, you can read it and you can think how does this actually apply to me. The challenge of DeFi was there are so many different terms and conditions that will be used by platforms that change, in the in the life cycle, you could have had a disposal of beneficial ownership under one terms and conditions that may not actually happen later on. And that guidance whilst it came out in February 2022 had actually been worked on for some time. It was a challenging topic because just as you started getting a handle on it, terms and conditions changed, the platform became a bit more popular, and then you’re like okay so how does this apply to this platform and then it was a never-ending cycle of when do we ever publish on this? The guidance includes a lot of detailed examples to try and help people understand these really complex topics.
💩 So, do we agree that the DeFi guidance sucks?
Dan: So do we agree that maybe the DeFi guidance does suck, but at least we have the opportunity to speak to HMRC? We can go through industry, we can go through lobbying efforts to get change but at least we have that clarity, that foundation to push for change.
Dion: Yeah. I would say the DeFi guidance doesn't suck, it was actually quite well written, actually a person from DeFi said that they read the guidance, then reflected then they thought actually you're right. One person said they really wanted us to get it wrong, but when they went through it, again their words, they thought actually we're correct in the views. That's the challenge here. If it's not working it shouldn't be shouted down why not, it should be used as the framework to say okay this gets really complex, really difficult to implement for customer and HMRC, we need to find a better option.
Dan: It sucks from the perspective of the individual user. I do agree that if you read through that guidance, it's very hard to disagree with how it works from a B/O perspective and I haven't spoken to a Tax Advisor that doesn't disagree with that.
Dion: I have to say the technical specialist who I was working with on the DeFi guidance, his knowledge of crypto is phenomenal. People don't think HMRC have got good understanding, but his knowledge of crypto is excellent. We sat there and went through it, it was just like a simple transaction, it's just disposals everywhere, it was horrendous. Even when I put that to a HMRC audience in a technical conference and said “how many disposals do we have here” very few in the room got it right. That was scary.
🖼️ Are we going to see NFT Tax guidance?
Dan: That highlights the challenge of crypto. Things move quick, are so innovative, that you've got to put your finger on the pulse and say we've got to produce guidance on this particular area it may or may not be relevant by the time you actually put it out there. Or something completely comes out of the blue, like NFTs or ICOs. So we've now got DeFi guidance, I presume we're going to see some NFT guidance?
Dion: Yeah there was space in the manual map when I left for the NFT guidance.
Dan: Well I won't I won't push too hard to ask when it's coming but it's obvious from the guidance that there is more to come. And you know, you've kind of framed that in a positive light, if there are negative aspects we do actually have the opportunity to push for change so I think in all the guidance is a positive thing out there.
Dion: Yeah you might not like paying tax, and again who does, but it's much better to know you have tax to pay than have an enquiry and then finding out. Even if HMRC hadn't put guidance out, you still would have had a tax liability - the guidance did not create crypto tax. There is just tax and crypto’s overlaid on it. In 2018, when people say I can't believe this has come out, it was just actually the application of the law as it currently stood, we were just informing, helping customers, helping people understand what that actually meant for them.
✍️ Explain your Recap guest blog "What to do if you get an HMRC crypto investigation?"
Dan: Yeah, so the blog that you've just written for us, what were your aims for that? A lot of people perceive HMRC as this heavy-handed actor that's going to make sure you pay the maximum penalties and fines and… I think your blog post alludes to some fairness in there. If maybe you haven't filed, there may be some kind of leniency depending on your behaviour in answering questions, maybe if you come across as aggressive and not answering the right questions then maybe that could go against you.
Dion: So the blog, the first part is trying to demystify a bit of HMRC; so what happens if you get that brown envelope? Unfortunately, we can never say how to avoid a brown envelope, and sometimes what you do next is the big trick. It’s easy to become almost paralyzed by fear with it and to ignore it and think it's going to go away, well obviously it won't and the consequences will only ever escalate if you continue to ignore HMRC. But it's how to make sure you put yourself in a good position to actually answer HMRC if the envelope drops and it's always better to, to plan for such events, rather than try to deal with the fallout once it actually comes. Trying to get all your information together to calculate your tax liability, if there is one can actually take quite a length of time.
So the idea of the blog firstly is to educate, demystify and also to tell the story of the person who's on the other side of the letter. Quite often I don't think their story is ever told much, there's a link to the Anderson blog where I tell my story, about my time in HMRC which was 18 years in Revenue and Customs, so, whilst I spent four of that dealing with crypto, I had actually done aspects of the work like in the fraud investigation service, where I dealt with what they call COP8 and COP9 enquiries. The Cop9 enquiries are where you've got serious investigation, so you know I dealt with the whole spectrum of cases that are out there. And it has to be said that when you are going through the information, “Don't Lie” - the one thing I've said to take from the blog is to tell the truth throughout. It's a bit of a fine line at times because you want to give the officer enough information to undertake their job, but if you just give them reams and reams of information that's just not relevant to the enquiry well, that isn't quite as helpful either. They're not going to send it back and tell you off for it but obviously what you want to do is make sure you get in and you out. No HMRC enquiry is ever quick, there's always time pressures and delays and when you're working on the other side of HMRC it's not necessarily resourced in terms of the workload. It's always constant churn and so they will have quite a significant workload to get through as well, so the better you can provide the information, more concise manner, the quicker you can actually get yourself from one end of the enquiry to the other. By all means it is common for people to be worried about it and this is where professionals and the agent community, such as ourselves at Anderson are there to help. Working through how to deal with HMRC can be tricky but using agents who are used to dealing with HMRC will always make things much easier. So fundamentally that is the blog.
🧐 Why would you end up in an enquiry?
Dan: Thank you. You mentioned some good points there, we've said on the podcast a few times, make sure that you are represented by an accountant that understands crypto, but you've also highlighted that you maybe want to be represented by, if you are under investigation or an enquiry, an accountant whose used to representing people in these situations. Because there are different types of accountants out there, there are some that as part of their day job they're probably never interacting with HMRC, whereas others may be doing that day in, day out, so I think you raise an important point there in finding the right representation to help you through the process. But can we talk about how you would end up getting an enquiry. You know, if I filed and I believe that I filed everything correctly - could I still end up with an enquiry from HMRC?
Dion: Absolutely, you can still end up with an enquiry. So, there's a great big sausage machine in the background which I'm not going to go into lots of detail about, but you could have other aspects of your tax affairs that have come up that may actually be prompting that. You putting your return in might be part and parcel of a wider check on particular aspects. There are what's called test and learn activities where they may identify a particular risk and then they will open a small amount of cases to test whether or not that risk actually turns out to be true or not. Sometimes you'll get a letter from HMRC, called a nudge letter, which is meant to be more of an educational prompt. We did the crypto nudge letters in, December 21, I want to say, and the whole aspect of those was actually part of that educational piece that you were saying before, Dan. Because we identified people who had crypto and actually tried to get out there and dispel some of the main misconceptions that exist when people actually have crypto. And so that is what that whole nudge letter was actually all about. It was not like some great posts on the various different forums like on Discord and so forth suggested, with people saying that oh HMRC is after me again. Actually on this HMRC was trying to help, not everything that HMRC does, and it comes back to your point earlier about being heavy-handed, not everything that HMRC does is there to punish a lot of the time. In fact the vast majority of the time, what HMRC wants to help people get it right before they file. If you get it right before you file then it makes it easier for yourself and makes it easier on HMRC, undertaking an enquiry takes significant resources and if people can get it right first time, then that's the goal, that's the ambition. It's not to say that obviously anything you send in will get accepted because there has to be those checks and balances and there has to be, I don't want to say threat, because that sounds the wrong word, but I think it comes across in that way. Even if you are in an enquiry what it all comes down to at the end of the day, if you have got it wrong, it comes down to what they call customer behaviours with the penalties. And you may have heard a lot about customer behaviours, in the in the news recently with certain ministers. So there's basically four bands of penalties that can get applied - deliberate and concealed, deliberate, careless, mistakes despite taking reasonable care. And obviously, as it sounds like, from the top end deliberate concealed - you'll get a far higher penalty which can be, particularly if you have international aspects to your tax return, up to like 200% of the tax that hasn't been paid, but if you make a mistake despite taking reasonable care then no penalties would get applied because, despite the fact you have got it wrong, you have taken reasonable care. And I think that's quite key and critical when we talk about the heavy-handed nature of HMRC. You won't look at an enquiry and say “I want this one to be deliberate and concealed” because it all depends upon the facts and what the customer's actually done and in many ways again this is where professional agents can actually help you navigate through the process. Because it can actually help you understand as to how the information should be put to HMRC in a way that actually makes sense as well as makes sense for what the client's actually done. Sometimes you feel that you've done wrong because that letter has fallen on your doorstep, instantly you're going to think oh no, oh no, something's wrong here, but it might not necessarily be the case.
🧮 Should HMRC be promoting crypto tax software and be more responsible for education about tax?
Dan: Um, yeah. I mean we kind of see these enquiry letters intensifying over the last couple of years since we've been in business and particularly this year, I think we've done probably over 10 now, supported individuals, helping them get their data together. So I think I think all of this kind of comes down to really you know do you want to sleep at night - is what we've talked about on the podcast. I'm very much of the opinion I want to stay out of any brown letters, I don't want the stress of it at all and you know it's why we built Recap. We want to help get all your records in order and we want to remove the disconnect between your tax position and your trading position. And when you're on top of your tax position rather than retrospectively trying to get on top of it, you're in a better situation because you can understand things like your allowances, you've got the opportunity to optimise things, time things the right way. I think again a lot of this comes down to education. A lot of people treat taxes like this thing that you do once a year, maybe you do it in January, much to the discontent of your accountants. But if you do get on top of it and you do kind of get into this mindset of it's something that you should be on top of at all times you can actually benefit. So do you think that HMRC have got a role to play in, I’m going quite bold on this, but in promoting crypto tax software as such? There are other kind of areas of accounting in business where certain software is promoted in certain ways, do you believe there's a responsibility of HMRC to maybe promote crypto tax software?
Dion: Yeah, it's a challenging one, it's actually one which I was also dealing with just before I left, so there was plans in place, but I'm not too sure what happened to them. Anyway, there is an aspect of trying to help promote crypto software, but part of the challenge that HMRC often has is whether or not people may think that the software is going to be correct. Um and I think we can agree without going into too much detail that perhaps not all software is created equally with crypto and so wouldn't necessarily be fair for HMRC to also treat it in that way either and there's a whole risk there. So when some different software packages are actually promoted, HMRC might actually own the code behind that and then different software platforms can use that to plug into, to create the result, which isn't the case with crypto software. I think that's where, that's where some of the challenges are and HMRC must be understandably, commercially neutral, it can't favour particular parties over the detriment of others. It has to be that that neutral player in the market otherwise it just creates an inequity, which I'm sure you'd feel if one of your competitors got highlighted and promoted heavily whilst you weren't.
Dan: Yeah, absolutely. It’s a challenge. I'm just thinking of ways that we can kind of, software is probably the number one way that you can help educate people. If you get that in front of people you know you have a great user experience in there we can educate people around taxable events. Probably better than any kind of YouTube video or HMRC guidance.
Dion: The challenge I think here is that the guidance and YouTube video’s not actually going to give you a return to provide to HMRC if that envelope comes or when you have to declare your liabilities. You've still got to do the hard work, you've still got to do the graft to actually get the final figures at the end. And yeah, this is where software comes very much into the fall because that makes it easy to do. Once that brown envelope arrives there is a clock, if you don't reply by a certain date then you can get what's called an information notice and then if you don't respond to the information notice then you can start getting penalties charged too. Obviously if there's reasons why you can't respond you have to speak to the officer that's in charge of your enquiry, because they may be able to give you extensions. But if you've already got the information to hand then as soon as that envelope arrives then you can pretty much send it all off and then they can get on with doing with whatever they want to do. It is that, helping you sleep at night. It is that, reducing that stress upon yourself. It is that, making sure that you are doing everything that you are obviously legally allowed to do to minimise your tax burden.
🌎 What is CARF and what can we expect from it?
Dan: Yeah, sure. So one thing that I thought would be good to cover is CARF and I know this is something that that you've been involved with. Could you just give a quick introduction to what CARF is and how it's going to be effectively shaking up crypto tax in the UK and other jurisdictions?
Dion: So CARF is the Crypto Asset Reporting Framework, and it's a framework at the moment so we’ll see how it actually, if it gets ratified because it's coming from the OECD, the Organization of Economic Co-operation and Development and yes, I was part of the negotiating party with the OECD, representing HMRC in the UK and the discussions and CARF will be a significant change to the information that's going to become available for HMRC. Currently information that is available will become hugely, should we say enriched, with additional information that will actually then start coming from the countries that agree to join the standard. A similar type of agreement is the Common Reporting Standard or CRS, and under CRS about 100 jurisdictions have actually signed up for automatic exchange of information, between each other on information held by Foreign individuals at their financial institutions. So that means, Dan, your Canadian bank account is actually known to HMRC already because the Canadian Revenue Authority will already be providing information to HMRC. Now if you have then an exchange, which was considered to be a Reporting Crypto Asset Service Provider or an RCASP, within the agreement and let's say that's also in Canada, then that would also be caught by CARF when it's ratified and then the Canadian exchange would also then provide your crypto information to HMRC as well. And so what you'll see then is it gets ratified to the same level of CRS. The OECD did bring this in as a possible threat to CRS because obviously then it becomes a lot easier to jump out of your bank account and to set up a crypto one and that was part of their concern, then you can just circumvent the rationale for CRS. And if as many jurisdictions sign up to it as with CRS then we are talking about significant amount information that has been provided to HMRC, and I have to highlight very quickly that information is already going to be coming from foreign authorities to HMRC as currently stands under existing tax treaties so CARF is a huge simplification, huge enrichment of the information but information has already been received into HMRC.
Dan: Okay. So we can kind of speculate as to you know, if this does get ratified or even the state of the market as it is right, things will probably intensify as cryptoassets become more mainstream in the future.
Dion: Quite, quite possibly, it's always hard to predict the future. But it will provide a lot more information thats commonly available to HMRC. There'd be a similar kind of impact as to the CRS and implementation which was quite, quite significant in terms of HMRC's operational capability.
⚖️ When should you file, should you refile?
Dan: So again, going back to sleeping at night, knowing that these frameworks have been talked about on a global stage perhaps, maybe you haven't filed, maybe you should now, maybe you filed inaccurately, maybe you should refile, maybe you should address these things before they become a bigger problem.
Dion: Always before is the best plan, yes. It’s much easier to sleep at night if you already know everything's already in order, you have the information that's necessary and again as you alluded to earlier Dan it's actually then making sure that you are in the best financial tax shape possible as well. Yeah. It is complex.
Dan: Yeah. I was actually talking to a client about much of this last week actually, and we were kind of saying that crypto potentially has the capabilities of generational wealth. It's like investing in the early internet, you know if you had Google or Amazon stock in the early days, you could create generational wealth. I think we're kind of playing in the same territory and you want to make sure that you're paying your taxes right at the moment, because if you've got a big fine to pay, at this time of opportunity, you're going to impact your ability to generate generational wealth. I think it's also important to highlight, that with your crypto taxes, to get on top of everything can be quite painful, if you've been doing a lot of activity, but once you have got on top of it you can kind of just be proactive moving forward. It's not something that you're going to have to visit for hours on end every year. So you've just got to put the work in to get up to speed; get your cost basis sorted; get filing and then from then on everything should be quite straightforward moving forward.
❌ Misconceptions around crypto tax
Dion: Yeah absolutely. And you know to quickly highlight the misconceptions as well, because that might resonate, if you've just bought your crypto and you've held it because let's face it last year has not been the best year for selling. So, if you have just bought Bitcoin and you've just kept that Bitcoin, then you wouldn't actually have a tax liability to worry about. If however you have bought Bitcoin and then you've sold it for ETH or XRP or anything else, if you've actually bought anything else then that would be considered to be a taxable event because that's going from one asset to a different asset so that would be that would be chargeable. If you have done that and then you're thinking but I haven't actually taken the money out of the exchange, that's irrelevant to the establishment of whether you actually have a tax position. If you've also been using let's say a crypto credit card to go and purchase a coffee or whatever that would also be considered to be a disposal because at that point you're selling your crypto and fundamentally it's getting converted into Fiat so it is a disposal and that'll be a generation of a tax event as well. And these are matters that were actually highlighted in HMRC's market research and things which I have seen since 2018, reoccurring themes where people continue to not quite understand some of the main small things that get wrong. You might think you're affairs are in order, but you might want to check that again because there might be aspects there that you didn't realise you were getting wrong. You might want to almost health check -make sure your affairs are correct.
Dan: Yeah. Some interesting points there. The one that we see a lot is if you haven't withdrawn it to your bank account then you don't think that you have tax to pay. I think that's probably the most common misconception that we that we have to deal with, on frontline support at least. I think it's interesting what you said - if you hold, you don't have to do anything there's no tax to pay, there's no taxable events and that's something that I want to push to people. You know if you'll find it difficult to keep on top of your taxes and you believe this is an opportunity for generational wealth, maybe don't throw things into DeFi products, don't swap in-between assets all the time. Yes you might be making profits from doing those activities but then if you consider the time aspect and your record keeping on top of all of that, is that any better than just holding for the long term? And I think history kind of shows if you invest and make a long-term play you typically always end up beating the people that are making the short-term and that may simplify your tax position.
Dion: Isn't that the Warren Buffett approach? Buy and hold?
Dan: Buy and Hold, it's the original Bitcoin approach right. Take yourself out of all the headaches. Lock it away. Don't access it, forget about it and then think about it in 10 years time and it's either going to be worth a lot, or zero.
Dion: I'm just thinking about the value of Bitcoin in 2013 which was, I think about 20 dollars. Because even now with the way Bitcoin is taking a bit of a pounding and since the all-time peak of 64,000 dollars. Even now you'd still be very much in engaged territory wouldn't you, so yeah maybe. And I think this is also what you're pointing at; one of the challenges which I certainly found at HMRC was the complexity in which these products make it really hard to deal with from a bespoke tax and legislative process. So, as soon as you almost have one aspect, should we say, dealt with, something else comes along that's so completely different. Each year has had a relative if you will so 2017 we had the boom year, 2018 was 2018 we had the ICOs, the initial coin offerings, 2019, then we had the winter. 2020 we had the DeFi boom from the summer time and then the following year we had NFTs hugely taking off. Last year was a bit more of a winter year, it was almost like an ice age last year but definitely a retraction in the market, so we might see another boom type year, this year. But, with each of those products, so ICOs are very different to DeFi and obviously DeFi lending has been around for some time, but when I talk here I talk about the mass adoption. Because the NFTs didn't just come into existence when they became popular some points become really, really popular and they come then into the public consciousness much more and then that kind of feeds into the boom. But what you would have, with the legislative approach if you wanted to make something bespoke, even if you had got something bespoke for ICOs, it would not be helpful for DeFi, if we have something bespoke for DeFi, it wouldn't necessarily be helping your NFTs. And this is part of the problem with the way the law works is, if you can define something then it's quite easy in the crypto space for someone to then go and do it no longer follows that definition and or do something in a completely different way and that also leads to a lot of the challenge for authorities to actually provide certainty. And the more these things change, the more certainty I would think people would want. Again market research said about 10% of the adult population owned or had owned cryptoassets, we can only expect that figure to have grown, and so the more people who become involved, actually if you wanted to get to that level of mainstream adoption at some point maybe innovation needs to slow down a pace or innovating in a way that's helpful for authorities. I'm not, I'm not too sure how that actually works, um as I say it out loud, but it's again challenged by HMRC case workers. So this brand new thing comes out and then you're trying to explain it to HMRC whether it's on the call lines or not. I do remember an excerpt I overheard from a call handler where someone was trying to explain to them, a token that had forked, they wanted to know what to do, and the call handler said cutlery wasn't chargeable and so they're thinking normal fork, and the person calling is talking about a blockchain fork. Completely different world and this is again where the education becomes really difficult in an industry that almost demands 24/7 attention to keep up with the development.
Dan: Yeah. I often mention this. We work in industry right, well we both do and it's impossible to stay on top of everything. Um, I'll openly admit NFTs completely passed me by when they came to the market and I'd like to think that I'm somebody who's quite involved, always on Reddit, always on Discord, I completely dismissed them, and all of a sudden the most major asset class that came about.
Dion: Yeah. At the beginning of the year for the NFT year people are saying to me and HMRC “What do you think is going to be the big thing?” Did not call NFTs at all and yeah I ended up having to really eat my hat with the OECD secretariat, because we'd been talking about DeFi earlier in the year and I said “I don't see that taking off, I wouldn't worry too much about it” but by the July that was really starting to take up and by the end of the year it's like, “Yeah, well miscalled that one!” It's so hard to know what comes next.
Dan: Yeah. If this was a new technology that was impacting regulation, we might end up with like a Sandbox, a place for us to do business where you know the authorities kind of know that it's impossible to stay on top of the innovation so they create a Sandbox around this stuff. Now is there an opportunity to do something similar from a tax perspective while the market's young and the market's still evolving until we understand exactly where this is going?
Dion: Mmm-hmm, no. Not, not practically speaking I'm afraid. You can, if there is an uncertainty you can request a non-statutary clearance if you can show where the material uncertainty actually lies. But there's a subtle difference between the way tax works and the way regulations work, so regulations, fundamentals don't come into effect until they come into effect, but as I said earlier, this is application of tax laws that currently exist. So what you would be, almost looking for there, so for some form of derogation from existing law, which would need some form of Extra-Statutory Concession which Parliament isn't too keen on these days. There used to be a lot of Extra-Statutory Concessions that say you know we're ignoring the law under specific purpose, to say you're ignoring the law for crypto would be, I think very hard to get past Parliament because again, as much as you say you’d like X Y and Z to make the law change, that comes down to parliament's decision. It’s not just something that HMRC can just do. And again you can't even create law you can't even create tax obligations by writing guidance, you know, guidance is just the understanding of the law as it currently stands. If you want to change that, so you mentioned earlier about beneficial ownership, you know, you couldn’t just change the definition of what beneficial ownership is because that's more of a common law concept that's been around for quite some time. It's not a tax definition that could be altered and even if it was, that would have to go past Parliament to get the law changed onto the statute book. HMRC implements the law, doesn't create the law, has a role to play in creating it, but can't just create it out of thin air. Unfortunately, I think what we've seen from a lot of the debate at the moment from the likes of the parliamentary or accounting committee, the recent Westminster Hall debate, I think there is and obviously the updated call for evidence consultation document that came out last week from treasury as well, about future regulatory approaches for crypto, I think there's still a lot of uncertainty as how crypto is developing and what to do for the best. So unfortunately, the idea of a Sandbox would be very hard operationally to actually do.
✂️ The capital gains allowance is reducing - is this a risk for the industry?
Dan: Yeah. I mean you could argue at the moment that your own personal sandbox is the capital allowance that you've got. Yeah, the £12,300 capital gains allowance right. You know, a lot of people that have got very basic activity can have a play around in the market, they can calculate their taxes and if they're under that threshold they've got nothing to pay. But those capital allowances are reducing quite quickly and are going to be reducing year on year. So we're going to see a lot more people brought into the scope of taxation, moving forward and again, people that are probably going to need software, people that are probably going to need to keep on top of things when they never needed to before. Which I think is probably a risk for the industry right? It's bringing a whole new cohort of people into the scope of filing a self-assessment return every year.
Dion: Absolutely. Now this was one of the, I suppose challenges you could say, if you will, previously, because until you'd actually gone past the annual exempt allowance (the AEA) you didn't actually have any taxable events to really worry about, but you'd have to do your full calculations to establish it. You could have thousands and thousands of transactions, you could go through all of that and you could find there's actually no tax liability. That's also part of the challenge from a HMRC perspective if you will, because if you just provided to HMRC a big spreadsheet of your transactions that you've undertaken, they'd also want to make sure that there's a potential should we say full revenue to come in because they're still very minded that it's all about risk to resource, that if there's a low risk they don't want to be applying resource to that matter. Again, this is where the nudge letters come into effect, where you really want to help educate people to get it right. As you say that £12,300 which I personally thought was quite generous for the AEA allowance and did actually take quite a few people out of the tax net, you look again market research showed a lot of people were below that type of threshold. But as you say with that threshold coming down and again to highlight the importance of working with professionals in the industry, because if you have been just doing PAYE you may not even be aware of one – filing, two - the annual exempt allowance, and three - the changes to coming to the annual exempt allowance. It's very hard to keep on top of tax, it's quite a full topic.
But when you have a little crypto and tax it does become even more complex there are other levels of uncertainty and there are aspects that haven't been written about in the HMRC guidance. So to give you a determinative effect of what happens in in certain situations and that creates uncertainty for and for individuals as to what should be the correct filing position, which again is the importance of actually making sure you have taken professional advice, because that that does start to become a big difference between being careless and making mistakes, despite taking care if you have just not actually sought any advice to get your affairs correct. Then the HMRC officer would be struggling to say you have taken reasonable care if you've just not bothered.
🏙️ Do you believe that the UK can become a crypto hub?
Dan: Good points there. I just want to, I want to finish on a high if you like. We've had some good news from the government right, they've got ambitions for the UK to be a crypto hub and we're seeing things uh, hit Parliament at the moment and we're kind of seeing regulatory barriers perhaps coming down in the UK. So, do you believe that the UK can become a crypto hub and a kind of like a you know one of the major jurisdictions for cryptoasset companies in the future?
Dion: I would like to believe so. I really would for the UK, we've often been an innovative country. We've, I know it's not really a financial product, it's a financial product here in nature, and we've often tried to lead the way in financials and technology, but it would be great for the UK to take steps ahead. I'm not too sure quite how quickly we're progressing on that and again part of the challenge does remain education, not just education of individuals this time, the education of ministers, the education of those that create the laws and the regulations. There's one thing for HMRC to pursue they'd be fully educated on crypto, but anything that goes through will have to go through with the oversight of Parliament and if there is that reticent for crypto to be taken on board, because unfortunately some of the more recent news obviously with FTX for example, and Celsius, have not played well for the crypto industry in that sense and that's just you know, that's just a realistic view of the matter. That's not to say that it's going to necessarily prevent the adoption or it's going to prevent becoming a hub and already if you look at the chain analysis geography report the UK was already leading in Western Europe anyway in terms of the level of crypto adoption and this is in the report they released last year in 2022 and so the UK was already firmly showing it is taking the lead in Europe. It's how does it maintain that lead? How does it go forward? And to some extent I think it has to be a cautious approach, to some extent it's got to be careful not to, you know go faster and break stuff at the same time because there is a hard fought position for the UK to be seen in such a positive manner. There's a lot to there's a lot to lose and there's a lot to gain.
Dan: Yeah. We've recently just released our own report actually and that puts London at the top of the list as the top city in the world for crypto and that involves things like quality of life index, the number of businesses there are operating here, the number of jobs available. We definitely look like we're on top, but a close second is Dubai and after that there's New York and we're in a very competitive environment at the moment and I think jurisdictions are looking to capitalise on effectively being that crypto asset capital. Like you say timing is probably the critical factor in all of this moving forward, so hopefully we can move fast.
Dion: Well that's a great point that you raised there, is the other jurisdictions are really starting to catch up and it is, the regulatory environment has also made it difficult for firms to register here. I don't think we really need to go into depth about the often cited issues of regulation with the FCA, where people have struggled to get the necessary permissions under the fifth money laundering directive regs to you know, to operate from the UK as a CASP/FAST depending which definition you want to use for that purpose. So I think that is proven to be part of the challenge. It was promising to see the paper from treasury last week, it didn't look well thought out to me, they did cover a lot of a lot of the key aspects, but I think some of this then still comes down to how will that actually operate by, be operated by the FCA when it actually comes to implementation. We could have the best regs in the world but if we're still struggling to get people through the money laundering regs let alone these additional regulations on top, what kind of burden does that actually put upon businesses to actually get this done? And I think this is the real challenge, where businesses are then having to say “Okay, we can't get regulated in the UK so where do we go for a regulatory structure, regulatory framework that is a bit more crypto positive” and that's definitely where it seems to be other jurisdictions are already starting to make their mark. And I have difficulty here because I understand how hard it can be for the policy makers and for the ministerial perspective when they think ‘they don't want to race’, they don't want to degrade regulations in their mind, to allow more firms to join, but this is again where potentially is possibly an educational barrier that they think, they read the headlines they see the issues of FTX and think all crypto firms are in those minds which obviously isn't necessarily the case. How do we encourage those people that actually it's not as terrifying as they may think.
Dan: Yeah. Comes back to education again, round in circles. Thank you very much for your time on the podcast, Dion where can people find you if they want to get in touch?
Dion: Read the guest blog "What to do when hmrc comes calling about your-crypto" - we've got a link to Anderson in the UK. So, we're actually quite a unique team, we have specialists across all aspects, whether it's private client or international corporation for structures. I think personally speaking, I may be slightly biased, I think we're the best balanced team with unparalleled crypto understanding and with tax to boot.