- The U.K. on Wednesday published notices encouraging crypto users to voluntarily report unpaid taxes to avoid penalties.
- A 2022 government survey showed 72% of crypto owners in the U.K. had not read its crypto tax guidance, but ignorance won't count as an excuse for tax evasion, experts told CoinDesk.
- Regulators can use a number of tactics, including whistleblowers and creditor lists from recent bankruptcies to track undeclared crypto, tax advisors say.
The United Kingdom is cracking down on unpaid crypto taxes. Investors may not know that they owe the government money, but ignorance won’t work as an excuse, tax advisors told CoinDesk.
In fact, the government could employ several different tactics to track down who’s not paying taxes or hiding crypto holdings, David Lesperance, founder of tax advisory firm Lesperance and Associates, told CoinDesk in an interview.
Some investors may not have even read the guidance or realized that their NFT trades could constitute taxable events, Dion Seymour, crypto and digital asset technical director at tax firm Andersen, told CoinDesk in an interview.
But if crypto holders don’t figure out what taxes they owe and come forward voluntarily, it could make matters worse for them, David Lesperance, founder of tax advisory firm Lesperance and Associates, said during an interview with CoinDesk.
"[The Treasury] is going to say, okay, if you're going to make us look for you, it's gonna cost you," Lesperance said.
Tracking unpaid tax
There are a number of ways that the government can find those who have not paid their crypto tax, Lesperance said. If an investor has money with collapsed crypto firms like FTX exchange or lending platform Celsius, then that investor could be “named as a creditor," during bankruptcy proceedings, he said.
The Treasury can check if those funds are included in tax returns, Lesperance added. The government can also rely on whistleblowers who know you invest in crypto, he said.
However, the Treasury may need to invest in more resources and hire companies like Palantir to help with investigations, Lesperance added.
The U.K. was also among nations that recently welcomed new international norms for crypto tax data sharing between authorities developed by the Organization for Economic Cooperation and Development (OECD).
"This means a lot more information going to [the Treasury] than people previously would have expected," Seymour said.
Calculating unpaid tax
If investors took “reasonable care” when declaring their taxes, they may have to pay what is owed in unpaid taxes to the government for a maximum of three years preceding the current tax year, the government said.
"If you took reasonable care, you read the guidance and you misunderstood it, but then you asked a tax consultant about it," Seymour explained.
If investors didn’t make an effort to get their taxes right, then they might have to pay up for a maximum of 6 years.
Those who deliberately evaded taxes – knowing that they should have paid them – or deliberately reported wrong figures, could pay a maximum of 20 years worth of tax on their crypto.
Not contacting the Treasury could mean additional interest and penalties, the government said, but they can be minimized if any errors are reported. The government can slap investors with penalties between 30% and 100% of the extra tax due for deliberately concealing crypto holdings from the government.
Ignorance is not bliss
On top of that, "the taxation of crypto isn't necessarily as straightforward or intuitive as some people may like," Seymour said.
People may not always realize they are creating taxable events, Seymour added. For example, purchasing an NFT using crypto like ether (ETH) can be a taxable event, he said. Purchasing crypto using other crypto could also be a taxable event.
"If [investors have] actually used software or they've kept on top of it as they've gone through the process then it won't necessarily be too bad, but if they haven't, then it can actually be quite a difficult process for them to calculate everything," Seymour said.
CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.