“At this stage it is about educated guesses” – Crypto Tax Specialist

“At this stage it is about educated guesses” – Crypto Tax Specialist

Overview

ICOExaminer sat down with Adrian Markey, a Chartered Accountant and Crypto Tax Specialist, to understand current tax legislation – and perhaps the lack thereof – in relation to crypto assets.

Adrian is based in the UK and specialises in crypto taxation for that specific jurisdiction. Whilst much of what follows will be of specific benefit for UK residents, it is likely that readers elsewhere will learn something about the questions raised by crypto-taxation in their own tax jurisdictions.

What follows below is a redacted transcript of our call with Adrian on Saturday, Feb 3, 2018. 

Transcript

ICOEX: Hello Adrian, thanks for your time this afternoon. Crypto taxation appears to be something of a wide subject, not least because of the various kinds of crypto assets out there.

There are pure crypto-currencies such as Bitcoin. There are ICO tokens of which many classify as utility tokens that are generally tied to as yet undeveloped products and services.

Finally, there are so-called stable coins: cryptocurrencies which are tied – in theory, at least, if not always in practice – to real-life, physical assets such as gold and the US dollar.

So the first question we wanted to ask is: are these crypto-assets all treated the same under UK law from a taxation point-of-view? Or does each type of crypto asset imply a different set of rules?

AM: Hello, that’s an interesting place to start the conversation, and the short answer is yes. But the short answer is not a complete answer, and for a complete answer to the question of crypto-taxation, you need to approach the question differently.

Before doing that, you need to start from the premise that, as things stand in the UK, there is no specific, formal framework for the taxation of crypto-assets.

To date, HMRC [UK’s statutory body for the collection of taxes – Editor] has only released one document providing official guidance on the taxation of crypto assets.

That document was published in 2014 and is roughly 1000 words in length, with about one quarter of its contents dedicated to providing a brief outline of what cryptocurrencies are.

The advice, then, is not something that can be considered comprehensive, and leaves accountants in the position of having to make educated guesses about how their clients should proceed with crypto-tax declarations.

At the same time there is, of course, existing legislation in place for traditional asset types which is very well defined and which outlines the procedures for dealing with VAT, Income Tax, Corporate Tax and Capital Gains Tax – and they of course are the natural points of reference for any accountant in terms of how to proceed.

ICOEX: Does that same observation apply to other countries other than the UK?

AM: A lot of accountants elsewhere are facing the same situation, yes. 

ICOEX: And, if we work from the assumption that the vast majority of our readers here are not purchasing and selling products and services in Bitcoin and cryptocurrency, does that mean we can narrow down the framework of this conversation to Income Tax and Capital Gains Tax only?

AM: We certainly can. In which case, the question for your readers is to determine which of those two brackets they fall into – and that in turn will be defined by how they acquire their crypto-assets, what sort of crypto-assets they are acquiring and, no less importantly, their underlying intent and behaviour when buying and selling crypto-assets.

ICOEX: And that is where your ‘educated best guess’ approach comes into play?

AM: Absolutely. There are a few typical scenarios. The first one is: you buy some Bitcoin, you let it lie for a while, it appreciates in value and you decide to cash in. In that case, the transaction will (likely) almost always qualify as an investment – and you will thus become subject to traditional Capital Gains Tax which will sit somewhere between 10 – 20% depending on your income, bearing in mind that, under current legislation, individuals can qualify for exemption for the first £11,300 of capital gains.

On the other hand, if you are someone who is actively buying and selling crypto-currencies on a high frequency basis, then you may find that HMRC will consider this as trading activity and, as such, you will thus be liable for income tax on each disposal. As such, you can also expect to pay National Insurance contributions. All in all, in that scenario, depending on the level of your earnings, you may find yourself paying anywhere between 29% to 54% in tax.

ICOEX: Can we go back to that term ‘disposal’? What do you mean by that?

AM: Yes. In the context of crypto-currencies, this essentially means any time that you translate your crypto into another asset type – including crypto. If you have Bitcoin and convert it to cash, that qualifies as a disposal. If you have some Litecoin, say, and use that to buy some TRON, that qualifies as a disposal.

ICOEX: And presumably, in the Litecoin/TRON example, the disposal value is defined by the market value of TRON in British Pounds at the moment of purchase – because that is the only obvious approach for placing a value on that TRON for the purposes of tax calculations?

AM: Correct.

ICOEX: This sounds more straight-forward than we were expecting, which itself sounds too good to be true?

AM: Well, it is and it isn’t. The problem is that I am giving you some very clear-cut cases here – at least from my own reading of the current legislation in place. There are plenty of other areas where HMRC need to provide guidance and we simply are not getting any at this point in time.

ICOEX: Can you give an example?

AM: Since you are a website specialising in ICOs, let’s talk about ICOs. What happens when you buy into an ICO? What exactly are you purchasing? I’ve read your own blogs on the subject where you refer to ICOs as concept sales – because that’s exactly what many of these ICOs are.

They are not selling an existing product or service, but the promise of delivering one at some point in the future – of which there is no specific guarantee. There is a very strong case for arguing here that this is a form of gambling.

ICOEX: Which is not taxed?

AM: Correct. Now, as I’ve stated, we are making educated guesses here. However, my own feeling is that over the next year or two – although with Brexit, things may take a bit longer – we will start to see some very large crypto earners having their tax returns challenged by HMRC and taking their appeal to a tribunal because there will be fundamental disagreements about how HMRC should be taxing their wealth. 

That will set some precedents, I suspect. And I also suspect we will start to see a number of tribunals being brought once the current tax year ends on April 5, as some taxpayers start to declare crypto-derived gains and losses on their tax return.  

ICOEX: So choppy waters ahead then?

AM: The best solution all round, really, is for government to set out a clear, unambiguous framework created specifically for cryptos because, right now, we are proceeding on the basis of an amorphous hybrid of existing legislative frameworks that will cause an administrative nightmare going forward if things are left to continue as they are. And, to be perfectly honest, cryptos are sufficiently different, in my opinion, to justify their own framework.

ICOEX: You are one of the very few accountants out there with a background in crypto – it took us quite a while to find you. How exactly does an accountant get into crypto in the first place?

AM: I was introduced to Bitcoin very early on, as it happens. I had a friend who mined Bitcoin – back in the day when it was still possible for individuals to mine Bitcoin as lone wolves successfully. And it was from there that I myself got into the game.

I was fascinated with how things worked on the back-end, from a technical perspective more than anything else. I developed something of a a fascination for the endless possible business applications for the blockchain. 

Through all of that, naturally, I picked up some other cryptos along the way and, of course, as an accountant, I then had to confront the issue of how this is all dealt with from a taxation point of view.

ICOEX: The fact that there aren’t many crypto-tax specialist accountants out there surprises us somewhat. 

AM: There’s a few. Not many, but there are a few – in the UK, at least. At the same time, I think we can expect all that to change in the very near future. I suspect 2018 will see big changes in that regard.

ICOEX: Adrian, once again, thanks for your time. And we may just come running back to you for your interpretation of new developments in the crypto-tax space which, from the sounds of things, will be coming not too long from now.

AM: It will be a pleasure. Thank you.