The emergence of cryptocurrency as a major investment class meant it was inevitable that financial regulators would need to respond by establishing when and how digital assets could be bought, sold, and, above all, taxed.
With the advent of facilities like the XRP Credit Card as a means of making real-world payments through instant conversion to fiat currency, this imperative has increased further. It would be unsustainable to permit a situation to persist where unregulated currency could circulate freely outside of the rules-based jurisdiction applying to the financial system.
Regulators have had to consider a range of possible issues:
· How digital assets are classified for tax and investment law purposes
· The oversight of funds transfer to prevent illegal activity, such as money laundering
· The potential for central banks and regulators, while not issuing currency, to control its use
· The possibility of central banks issuing their own digital currencies
· Regulatory alignment between different countries
How Have UK Crypto Tax Regulations Been Tightened?
In some cases, laws have been in place for some time. For example, in the UK, cryptoassets have been classed for tax purposes as property, rather than currency, since 2018. This has involved HMRC applying an existing definition to cryptocurrency rather than creating any separate category.
This has meant that the trading of cryptocurrency has been subject to capital gains tax, although income gained from transactions is included in income tax calculations.
However, the tax laws around cryptocurrency in the UK have evidently not been as watertight as they might have been. For this reason, new rules were introduced from January 1st that anyone buying or selling cryptocurrency in the UK must provide their account details to HMRC or face a penalty.
Known as the Cryptoasset Reporting Framework, or CARF, this will involve the automatic collection of bank details from all users of cryptocurrency exchanges, as well as requiring such agencies to reveal who conducted each transaction, what was traded, and what the value involved was.
In the absence of such information, millions of pounds of capital gains tax have previously gone unpaid, something HMRC can now remedy.
Speaking to the BBC, Dawn Register, tax dispute resolution partner at accountancy firm BDO, said: “HMRC has been concerned for some time about high levels of non-compliance among crypto investors.”
What Are The Ramifications Of Tighter Crypto Tax Regulations?
Although this may be costly for some who would otherwise avoid tax on crypto transactions, the news may be broadly welcomed for various reasons:
· It removes the unfairness of a situation where some people are willingly compliant with the law and pay their taxes, while others do not
· Taxes collected this way do not have to be obtained by other means to plug holes in government finances
· Such regulation is better for the reputation of crypto as it prevents it from becoming known as a means of evading taxation
· The tighter tax rules can tie in with ongoing wider efforts (on which the UK government is presently consulting) to establish a comprehensive regulatory regime for cryptocurrency
For all these reasons, the big picture is likely to be a positive one for the status of cryptocurrency, helping it to avoid a reputation as something shady for use in nefarious financial dealings and, instead, become something that is increasingly mainstream.
What Will The UK’s Next Cryptocurrency Moves Be?
Indeed, once crypto is on a firm footing as an asset but also as a means of payment, all within a clear framework that defines and upholds its place in the tax system, the likelihood of more official involvement (such as the Bank of England launching its own cryptocurrency) increases.
This ‘Digital Pound’ idea was first floated by Rishi Sunak when he was Chancellor in 2021 and although this idea was not taken forward at the time, the increasing normalisation of digital currency might make its future introduction more likely.
Stronger tax rules may also help the case for regulatory alignment. The UK has been working with the US on this, with the second Trump administration being heavily involved in crypto and taking a pro-crypto stance that contrasts with the suspicion of the Biden administration and President Trump’s lack of interest in his first term.
Such moves may be important in the context of the Trump administration’s ambitions to make the US the most important nation in crypto (alongside everything else). The more important a part of the global financial scene crypto becomes, the more of an imperative it becomes for London to gain from its involvement alongside New York.
By ensuring the UK regulation of cryptocurrency is comprehensive, Britain can ensure it has the credibility it needs. For that reason, the tightening of tax laws will only be part of the process and significant legislation for new regulations is likely to follow in the current parliament.