Cryptoassets Tax Investigations

HMRC may investigate your tax affairs if you have invested in cryptoassets, cyptocurrency, and virtual currencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Monero (XMR), Zcash (ZEC) and Ripple (XRP).

Our expert team of established Tax Specialist Solicitors and Barristers have first-hand experience and knowledge of the internal workings of HMRC. We have extensive experience in advising individuals, employees, directors and corporate clients in relation to serious tax investigations and prosecutions conducted by Her Majesty’s Revenue and Customs (HMRC). The way a taxpayer responds to HMRC enquiries and investigations can have a substantial bearing on any tax penalties imposed, even where errors are made innocently.

Therefore, it is important to take professional legal advice early to minimise tax fines, mitigate tax exposure as far as possible and ensure a settlement is reached on favourable terms. If you require advice on any tax investigation against you, contact our London Tax Solicitors and Barristers for a confidential consultation.

Why are HMRC investigating cryptoassets?

Cryptocurrencies are a new type of asset and are consistently evolving given the fluid nature of the underlying technology and areas in which they are used. Therefore regulations, investigations and HMRC enforcement of the taxation of cryptos is evolving. HMRC is a powerful investigating authority and has an arsenal of legislative penalties to conduct civil tax investigations and criminal investigations where it is suspected that tax or duty has been evaded, underpaid or under declared, or that a tax fraud has taken place. 

What are cryptoassets?

HMRC define cryptoassets as cryptographically secured digital representations of value/contractual rights that can be transferred, stored or traded electronically.

However, HMRC utilise the Cryptoasset Taskforce report (CATF) in considering that cryptoassets are not currency or money.

What is a tax investigation?

A tax investigation is an enquiry conducted by HMRC into the tax affairs and tax payment history of any UK individual, employee, director or company. A HMRC tax investigation can come in many forms and covers a range of taxes covered under HMRC jurisdiction such as: VAT; Income Tax; Corporation Tax and Capital Gains Tax.

The type and severity of the investigation is completely dependent on the facts of any individual case. Typically, an investigation generally commences when HMRC notice irregularities in information supplied via a Self Assessment Tax return. A taxpayer will receive a letter from HMRC informing  them that an investigation has been opened into their tax affairs and may include a request for information.

It is strongly recommended that you consult a tax lawyer as soon as possible to receive detailed advice on how to take control of the situation and negotiate with HMRC.

Can I appeal against a tax investigation of cryptoassets?

No. You cannot appeal against an investigation being opened.

However, once HMRC have concluded their investigation and issued a penalty, then you have 30 days to appeal the decision. You can appeal in writing by giving Notice of Appeal to HMRC. HMRC will either confirm their first decision, amend their decision or agree with your assessment.

If your position cannot be agreed with HMRC then two further options are available. HMRC could offer an internal review of the disputed decision (or you can request this procedure at any time). The review is an entirely internal procedure completed not by the original HMRC decision maker but by a different HMRC officer.

You could also appeal to the First Tier Tax Tribunal if you cannot agree your position following the review. The independent tribunal will make a determination on the case. A further appeal is permitted if you do not agree with the decision.

We have a proven track record of successfully contesting disputed tax assessments and penalties with HMRC. We are experts in adeptly presenting evidence and employing bespoke arguments combining the facts of your case, previous cases and current legislation to ensure your appeal is a successful one.The tax authorities have lost many cases that are appealed through negotiation, internal review or through the Tax Tribunal.

Detailed advice on HMRC Tax Appeals can be found here.

How will I know if I am subject to a HMRC investigation into my cryptocurrency?

HMRC will notify a taxpayer in writing when it commences an investigation into their tax affairs. Typically, if HMRC starts a formal civil investigation, a letter will be sent requesting more information. For example, a taxpayer may receive a request for information on a property transaction or further information about a tax return from a local compliance audit.

However, if HMRC suspects criminal VAT fraud or high amounts of tax evaded then it may commence criminal investigations. Typically, unlike for a civil investigation, HMRC are unlikely to notify you at the start of the process but instead you will be informed once you receive a letter requesting attendance to a voluntary interview under caution or when you are arrested.

Alternatively, even where criminal tax evasion is suspected, HMRC may wish to deal with the investigation through the civil route under Code of Practice 9.  This process offers a taxpayer a civil solution for potentially criminal evasion by allowing a full disclosure under contract (Contractual Disclosure Facility).

It is crucial that once under review, specialist Tax Investigation Lawyers are instructed. We regularly liaise with HMRC at formal meetings, agree what the scope of the disclosure should be and prepare the report on your behalf and reach a civil settlement with HMRC.  We have wide-ranging experience in assisting those facing a COP 9 investigation whilst helping to navigate the rigid time-limits and strict rules.

Which taxes apply to crptocurrency?

HMRC does not constitute the purchase and selling of cyptoassets as gambling, therefore taxes do have to be paid once the online currency is sold.

In most circumstances, cryptoassets are held as personal investments by individuals (either to make online purchases or for capital appreciation). In this case, individuals will be liable to pay Capital Gains Tax (CGT) when the cryptoassets are sold.

In addition, individual taxpayers are liable to pay Income Tax and National Insurance contributions on cryptoassets if they are received from mining, airdrops or their employer as a non-cash payment.

Do I need to pay tax from investment in cryptoassets?

Yes, however, there could be limitations to this.

It is likely HMRC will now discover bitcoin holdings as they begin to contact the biggest cryptocurrency exchange websites.

Guidance regarding taxation of cryptocurrency was updated this year stating that gains from 2018-19 should be recorded and taxes should be paid by January. It was also stated that losses should be declared also as they can be offset against capital gains.  

Taxation on cryptocurrency: HMRC example

The following is an example of buying and selling cryptoassets which HMRC considers to be taxable:

Victoria bought 100 token A for £1,000. A year later Victoria bought a further 50 token A for £125,000. Victoria is treated as having a single pool of 150 of token A and total allowable costs of £126,000.

A few years later Victoria sells 50 of her token A for £300,000. Victoria will be allowed to deduct a proportion of the pooled allowable costs when working out her gain:

Consideration £300,000
Less allowable costs£126,000 x (50 / 150)£42,000
Gain £258,000

Victoria will have a gain of £258,000 and she will need to pay Capital Gains Tax on this. After the sale, Victoria will be treated as having a single pool of 100 token A and total allowable costs of £84,000.

If Victoria then sold all 100 of her remaining token A then she can deduct all £84,000 of allowable costs when working out her gain.

I have received an assessment from HMRC

Our expert tax solicitors and barristers can assist you in submitting an appeal to HMRC or the Tribunal and entering into negotiations with HMRC by providing comprehensive legal advice and robust responses to the investigators. Our tailored team which also comprises of specialist forensic accountants can calculate what you owe and make representations on your behalf to HMRC.

Expert London Cryptocurrency Tax Investigation Lawyers

If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations into your cryptoassets. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.

Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.

We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].

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