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.
On Wednesday, the country's Treasury asked crypto investors to voluntarily calculate and disclose any unpaid income or capital gains taxes to avoid penalties or additional interest. Disclosure requirements apply to exchange tokens like bitcoin non-fungible tokens (NFTs) and utility tokens.
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 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
People may not know how much crypto tax they owe, Seymour said. A 2022 government survey showed that about 72% of former and current crypto owners had not seen the Treasury’s crypto tax guidance.
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 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.
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Read more: UK to Hit Crypto Users With Penalties for Unpaid Taxes
Edited by Sandali Handagama and Nikhilesh De.
