Positive News for UK Taxation of Cryptocurrencies ("Complete Overhaul Required")

Hello, best accountant in the UK posting here.

Below is an expert from a recent and very positive update between our Chartered accounting bodies and HMRC, it sounds like the UK is taking a positive stance on Crypto, trying to make the taxation more friendly, incentivising businesses to adopt Crypto and proposing a similar system to Estonia. Article is pasted below, I don't format because that's how I roll....

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In their responses to HMRC consultation on Cryptasset taxation, both the Institute of Chartered Accountants of England and Wales (ICAEW) and Chartered Institute of Taxation (CIOT) call for total re-think on the taxation of cryptoassets in the UK.

HMRC's July 2022 consultation, 'The taxation of Decentralised Finance involving the lending and staking of cryptoassets – call for evidence', puts forward three different options for tax treatment:

Option 1 - Legislate to bring DeFi lending and staking within the Repo and Stock Lending rules by defining cryptoassets as ‘securities’. The repo regime, prevents a CGT charge by following the underlying economic substance of the transaction and treating the sale and repurchase as if it were a loan.

Option 2 - Legislate to create separate rules for DeFi lending and staking, along the lines of those applicable to repos and stock lending: this would remove from the scope of CGT some lending and staking activities.

Option 3 - Apply a ‘no loss no gain’ treatment to DeFi loans and staking, deferring any CGT tax liability until the assets are economically disposed of.

Both tax bodies struggled to answer some of the consultation questions: they did not have sufficient data to respond. Both shared similar views in their responses.

The ICAEW considers that the current crypto tax regime is 'not workable' and it calls for a separate statutory regime to set out the tax treatment in this area and would provide more certainty of treatment both for taxpayers and for HMRC.

The CIOT recommend that fundamentally the government needs to start with a blank piece of paper and draft new legislation and guidance specifically tailored to address cryptoassets and their unique nature i.e. the flexibility in which they can be used, the potential number of transactions involved, their propensity to occur without commercial realisation, and the volatility of asset values. With respect to lending and staking of cryptoassets, it would prefer to see these De-Fi transactions removed from the ambit of CGT altogether, including the reporting requirements, until the assets are sold/exchanged and their value is realised.

The ICAEW observes that the current system for taxing profits and gains on cryptoasset transactions and investments results in tax being due despite no cash proceeds yet being realised, a so-called ‘dry’ tax charge. This is generally where crypto is being loaned or staked for some type of financial return. This system makes taxing crypto even more difficult as many investors do not realise tax is due, let alone understand how to tax their crypto transactions.

The ICAEW highlighted how Estonia treats crypto transactions, proposing that a similar system could be considered in the UK. In Estonia tax charges are split between capital gains and income depending on the type of return, with no tax being due until loaned/staked assets are returned to their holders as cash proceeds, so avoiding a dry tax charge.

Both highlighted the difficulties in taxing something which had such a high number of transactions which often in themselves had no effect for tax, with the CIOT noting that aspects of the tax system as it currently applies to cryptoassets can be challenging even for advisors, particularly with regard to the amount of research that must be done to determine an individual’s tax position and the level of reporting required. They expect that unrepresented taxpayers would find the present system difficult to understand and comply with, which they consider creates a significant risk of non-compliance.

Reform of the rules, says the ICAEW, should be more conducive to growth by incentivising businesses to set up crypto hubs in the UK, whereas the current system is likely deter such inward investment.