With the end of the tax year looming in April, we asked crypto tax expert Ben Lee those big fiscal questions that might be nagging a hole into the back of your minds.
Ben heads up the cryptocurrency and blockchain department at chartered accountants PKF-Francis Clark, and has for over 10 years worked as both a traditional business tax specialist and advisor to individuals and companies seeking expert crypto tax advice.
He’s also an avid NFT collector and DeFi enthusiast, which gives him a unique perspective on the difficulties that lie between the worlds of crypto and fiat.
Coming up to the end of the financial year, what general advice would you give to crypto holders and traders around the world?
My advice would be to take a look at how your portfolio has performed over the financial year, take stock of tokens and how they are performing, and whether it may be worth selling any tokens whilst the market is down to take advantage of the tax opportunities.
Are you saying I should sell all my SHIB???
Not specifically! If you’ve lost faith in certain projects and want to take the loss to reinvest in other tokens, selling for less than you purchased will give rise to a capital loss you could offset against gains made throughout the financial year. If you are sitting on capital gains from disposals when the market was bullish now could be a good opportunity to lower your tax burden in this manner.
Taking advantage of this will depend on when your fiscal year ends. Here in the UK for individuals our tax period runs to the 5th April, but other countries have different financial years, with many running on a calendar year basis.
I always leave things like this to the last minute…
There is some hope! In the UK for example, tax on crypto is disclosed and submitted through a self-assessment return which is due the following 31 January. Whilst this provides a long period of time to sort out your tax affairs, the earlier you can ensure records are up to date and accurate, the longer you will be aware of any payment obligations that will need to be made.
Leaving matters to the last minute will often prove costly in both time (as often even with the assistance of tax software tools, a review and amendments are needed), and in actual cost where you have engaged with an advisor.
Would you recommend individuals to engage with a crypto tax expert?
It depends on whether you think it’s worth the money against the cost of your own time.
But here in the UK we are seeing the tax authorities ramp up their level of enquiries into individuals investing in crypto with the aid of blockchain analysts. Where information is shared between exchanges and the tax authorities, they will be able to look at on-chain transactions to determine tax liabilities that may be due. Where they find investors before they have disclosed their activity, there could be heavy penalties and interest due.
Related to crypto tax, what do you think is the biggest news development that has happened in the last few weeks?
Something I have followed closely over the last few weeks is the Jarrett case that has caused a lot of speculation on the IRS’s approach to staking rewards. For those unfamiliar with the case, Joshua Jarrett and his wife engaged in staking their Tezos tokens and reported the staking rewards as income on their 2019 jointly federal income tax return and paid the relevant taxes.
In 2020 they filed an amended return on the basis they did not agree that their staking rewards should be subject to income tax. Initially the IRS did not respond so the Jarretts sued. Interestingly the IRS have been authorized to provide the refund, but have not provided a reason as to why, and the Jarretts rejected the refund offer.
There are very few legal precedents set in the way authorities seek to recover taxes from tax payers in crypto, but this case highlighted that when challenged perhaps there wasn’t enough in the legislation to defend that tax legislation did not provide for the taxation of newly created assets.
So staking yields shouldn’t be taxed?
Unfortunately, this case has not set any legal precedent yet, and I imagine advisors will continue to say that staking rewards are income, on the basis that tax legislation is broad enough to encompass the rewards as such.
Very few of us have the courage to challenge the tax authorities on their interpretation of tax law, and would much rather keep the taxman happy than challenge the status quo, but perhaps compliance is not the only option.
Are different countries taking significantly different approaches to taxing crypto?
Yes, a country's approach to taxation of crypto depends on their interpretation of what cryptocurrency is, along with their fiscal policy and appetite for incentivising crypto investment or trading.
In the UK, Her Majesty’s Revenue and Customs (HMRC) are fully engaged with wanting to understand the sector and how tax applies accordingly. There is no specific digital asset legislation here in the UK, but the general approach we have seen so far is to try and force crypto transactions into pre-existing legislation. In my opinion this leads to some entirely ambiguous situations, leaving taxpayers unclear on how to understand their affairs.
Because crypto is not recognised as a currency, in the eyes of the taxman we Brits are using assets to transact, and on that basis crypto transactions are essentially bartering transactions. This does not feel quite right, and again can yield unwarranted tax positions on certain transactions.
What about in other European countries?
Other countries are doing a better job of incentivizing crypto innovation. Germany does not levy any tax where the crypto has been held for longer than a year, and Portugal does not charge any tax on crypto gains made by individuals (but does for corporates).
Clearly, having a low or exempt tax regime for crypto shows that a country is challenging for crypto competitiveness at a global level.
I may have to move to the sunny climes of Portugal… One last question! What are your top 3 most vital crypto tax tools?
I would say Koinly, Taxbit and CryptoTax Calculator. They’re all pretty much the same, helping you to automate and track your crypto taxes and report them more efficiently next year. But they have different costs! Play around with them and figure out which one is right for you.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.