Client Login
Why, as a cryptocurrency investor, doing cryptocurrency taxes yourself might not make sense.
As a cryptocurrency investor, you are probably used to wearing a lot of hats. That kind of “get it done” attitude makes for a successful investor. But there is one major area of you that requires a very specialised hat—and that is doing cryptocurrency taxes yourself.
While you certainly can do your taxes yourself, as a cryptocurrency investor, that does not necessarily mean you should. Let us look at some of the key reasons why doing taxes yourself might not be the best thing for you:
1. Numbers Are Your Thing, but You Do not Have the Bandwidth for Cryptocurrency Taxes
Let’s be real: Not everyone is a numbers person. And if you are not a numbers person? Doing taxes, yourself probably is not a good idea.
Cryptocurrency investors are used to working numbers, reviewing charts and price movement and price pairs etc. Even if numbers are your thing, it does not necessarily mean that doing taxes yourself is the right move. Due to the complex nature of UK cryptocurrency tax, only selected few accountants and tax advisors are currently providing cryptocurrency tax services in UK.
Accountants and tax advisors who normally love to work on tax matters relating to individual, businesses, property and other tax matters find it difficult to comprehend the cryptocurrency tax. so, if you are thinking doing your tax yourself then think twice.
If you are using an accountant to prepare your cryptocurrency tax affairs it is importance chose an accountant who specialise in cryptocurrency taxes and have the relevant experience and expertise to navigate and keep up with the ever changing cryptocurrency tax landscape.. There are simply too many things to know and consider dealing with cryptocurrency taxes.
Irrespective of whether you are a company or an individual seeking the advice of a specialist cryptocurrency accountant can stand you in good stead. They will not just help you make the most out of your investment but will also help you protect yourself against non-compliance in the UK tax system which is extremely punitive and complex. You can save yourself from countless pitfalls if you have an expert opinion backing all your decisions.
2. Cryptocurrency Tax calculation software Just Do not Cut It.
Cryptocurrency tax software vs accountant
Cryptocurrency taxes and regulations are still emerging, but that does not stop tax authorities from determining tax on Cryptoasset. There are many online software portfolio and tax services that can help you collect the information either via API or manual upload of data from exchanges and wallets. This may help you to gather the data to start your cryptocurrency taxes. But once you have all this information in one place, what do you do with it?
Even if you are using a special cryptocurrency tax calculation software to gather the data and calculate the gain, you still need to figure out for yourself whether you qualify for certain deductions. Tax treatment of cryptocurrency relating to each transaction need to be carefully reviewed, to ensure that accurate tax treatment is utilised when calculating the taxes. ICO, Forked token, Airdrops, Lending income, Gift transfer between spouse, spends and charitable donations – each of these transactions have different cost basis and tax treatments and if these transactions are coded incorrectly within the tax tool, you can end up with incorrect results. Often, different cryptocurrency tax tools produce different result for the same data set, because not all tax calculation software’s cover all the relevant UK specific cryptocurrency tax rules and selection of different options within the tool may result in different results.
Some tax tools only cater to centralised exchange transactions, if you have margin trading or Defi transactions, then you need to ensure the tax tool can handle these transactions. Also, most importantly, you need to select the tax tool that can handle all UK specific tax rules such as S104 pooling and bed and breakfast rules etc.
Once you uploaded the data reconciliation of the token balance with actual portfolio balance is crucial to determine the accuracy. You will be required to make sense of the data to ensure have not missed anything. Cryptocurrency accountant will be able to help you to deal with complex situations, will be able to provide advance cryptocurrency reconciliation support to handle missing trade data error, incorrect cost basis, lost token due to scam and theft and much more.
Most Tax tool only provide online support. The guidance you will get online is there to help people who have a cookie-cutter tax situation, but if you have an exceptional situation, then it can be hard to find the exact advice you’re looking for. Besides, most of these software providers are not tax professionals, so they may be able to help with any technical queries specific to the software and not necessarily familiar with any tax questions. If you try to guess, and you accidentally put incorrect information on your return, then it could cost you big time in terms of audits, penalties, and interest charges for inaccurate submission.
There is no way around the fact that you will pay less for a software package than you will to hire a qualified experienced cryptocurrency tax professional. A tax professional is often able to make valuable tax saving suggestions that a software program just cannot anticipate. The value of this advice can easily exceed the additional cost of consulting with a professional. The capital gains rules have evolved over time to accommodate several different accounting approaches. Each approach raises different tax liabilities and only a human accountant has the skill and creativity needed to effectively minimize any investor’s individual tax liability.
3. Cryptocurrency tax is more Complex than other Taxes
Doing your cryptocurrency taxes is a time-consuming affair. And all that time you are spending on your taxes? That is time you are not spending on research and managing your cryptocurrency investment portfolio.
If your personal finances and cryptocurrency activities are straightforward, then filing your personal taxes can be simple, which is why so many people choose to DIY them.
But cryptocurrency taxes? They are another beast entirely. Depending on type of investment in cryptocurrency ranging from centralised exchange trading activities to leverage and margin trading of cryptocurrency derivatives and Defi exchange related transactions, ICO, airdrops, fork, staking, mining, lending, yielding, and farming …. the list goes on.
Essentially even the most straightforward cryptocurrency taxes are going to be significantly more complex than other taxes. And the more complex the tax process, the more opportunities for error, which could trigger an audit and HMRC tax investigation.
Hiring a specialised cryptocurrency tax professional frees up your time and energy to work on your portfolio while they work on your taxes. So, if you do not have the time to do your taxes (and do them right!), you should consider partnering with a specialised cryptocurrency accountant and tax advisor, come tax time.
Specialized Cryptocurrency Tax professionals have significant experience navigating each step of the complex process (which means you do not have to spend the time and energy figuring out how to navigate it yourself).
4. The Internet Can Be an Unreliable Place
Support and advice
If you do your cryptocurrency taxes yourself, you are going to have questions, like:
- Which forms do I need to file? What are my tax rates? When are the deadlines for filing?
- What transactions are considered as taxable events? Do you pay tax on token to token transactions? Do you only pay tax when cash out?
- Meaning of Cryptocurrency financial and tax jargon? S104 pooling, negligible claim loss, Loss harvesting?
- How cryptocurrency gain is calculated? What is Pooling rule and bed and breakfast rule?
- Will my cryptocurrency activities (mining, staking, farming) treated as trading activities or investment activities?
- Do you I pay Income tax or CGT on cryptocurrency transactions such as wages, freelancing and bonus token received?
- How do you tax cryptocurrency Margin trade, CFD and derivatives?
- How the DEFI lending, yielding, and farming tokens are taxed?
- How do I report /amend a tax return to include tax on cryptocurrency gain related to previous tax years’ tax irregularity?
- What is voluntary disclosure and when and how to use this to report cryptocurrency gain?
- What happens if I do not report my cryptocurrency gain?
- How to respond if I receive a letter from HMRC prompting me to declare my cryptocurrency gain?
- Can HMRC request my bank or Exchange to freeze funds from my bank account or exchange wallets?
And when you need those questions answered, chances are, you are going to head to the internet.
But the internet can be an unreliable place. There is so much information out there, and it can be hard to sift through out-of-date or inaccurate info to find the answers you need.
Working with a tax professional will ensure you get all your tax questions answered by someone who knows what they are talking about (no offence, internet!) Plus, you will not have to waste hours (or days!) desperately googling to find those answers.
5. Tax Laws Are Always Changing
Cryptocurrency tax planning and tax minimisation
Tax laws are always changing and evolving—and unless you are a tax accountant, you are probably not going to know about all those changes when it comes time to file.
Doing taxes, yourself “not knowing” can increase the chance that you will make a mistake on your return—which, again, can cause major issues with the HMRC. But it goes further than that. It can also cause you to miss out on deductions, credits and elections and claims and other tax planning measures to minimise your tax liability, you may be eligible for, which can significantly reduce your tax liability.
Some Tax planning strategies that Cryptocurrency investor may miss out.
- Loss harvesting and bed and breakfast strategies
- Claiming tax deduction for allowable losses and expenses.
- Utilising tax election to claim negligible loss claim for crypto losses of ICO and token which lost value.
- Use the correct tax rules when determining the cost basis for transactions such as airdrops, ICO, Gift and Forked tokens
- Utilising CGT allowance and lower tax band of your spouse or partner
- Utilizing tax efficient corporate structure, to shield from cryptocurrency trading profit cryptocurrency wages from higher income tax rates.
- Utilizing pension contribution to benefit from CGT lower tax rate.
- Utilizing tax reducer investment schemes such as EIS and VCT to reduce overall tax liability
- Timing of cryptocurrency disposal to defer the tax.
And if you were doing taxes yourself and did not know about this deduction? You would miss out on knocking a hefty chunk off your income tax.
It is a tax professional’s job to keep their finger on the pulse of what is happening in the tax world, including any new laws, credits elections or deductions. And when you work with them, you will know that your taxes are being done in accordance with the most up-to-date tax laws (and that you are pocketing as much of your money as possible).
6. Making Mistakes on Your Taxes Is Costly
Penalties and fines for cryptocurrency tax
The HMRC is not a mistake-friendly branch of the government. When you submit your taxes, they expect them to be completely accurate by taking reasonable care in filing your taxes, and if they’re not, it can cost you a lot of time, hassle, energy and cash.
Additional penalties and fines for late filing.
If you miss the deadline to file your tax return by the due date. You will be charge late filing penalties.
1 day late, £100 for one day after deadline
Up to 3 months late, £10 for each additional day (capped at 90 days), plus £100 initial fine – maximum of £1,000
6 months late, either £300 or 5% of the tax due (whichever is higher), on top of the penalties above
12 months late, An additional £300 fine, or 5% of the tax due, plus the above penalties. In the most serious cases, you may be fined 100% of the tax due
Late Payment interest
In addition to getting fined for filing your tax return after the deadline, you could also face charges for failing to pay your tax bill on time.
After 30 days: a charge equal to 5% of the tax outstanding, After six months (31 July): a further 5%. After 12 months (31 January the following year): an additional 5%.
Filing inaccurate, incomplete, or late return can result in: Hefty fines
There is a system of penalties for mistakes on your tax return. What you’re charged with will depend on whether HMRC thinks you have just been careless, or have purposely tried to lie about how much your cryptocurrency gain.
When there’s an inaccuracy, HMRC will determine what caused it. HMRC refer to this as the ‘behaviour’. The type of behaviour will affect whether HMRC charge a penalty and the amount of the penalty. There are 4 different types of behaviour.
Reasonable care Everyone has a responsibility to take reasonable care over their tax affairs. What ‘reasonable care’ is will depend on each customer’s abilities and circumstances. If you took reasonable care to get things right but your return or document still contained an inaccuracy, HMRC will not charge you a penalty. Some of the ways you can take reasonable care include:
• keeping enough records to make accurate tax returns
• keeping those records safe
• asking HMRC or a cryptocurrency tax adviser if you are not sure about anything and following any advice given
Careless This is where you failed to take reasonable care to get things right.
Deliberate This is where you knew that a return or document was inaccurate when you sent it to HMRC. Examples of deliberate inaccuracies include deliberately:
• overstating your cost basis for your crypto investment
• understating your cryptocurrency gain
• paying cryptocurrency wages without accounting for Pay As You Earn and National Insurance contributions
Deliberate and concealed inaccuracies This is where you knew that a return or document was inaccurate and you took active steps to hide the inaccuracy from us, either before or after you sent it to HMRC. An example of taking active steps to conceal an inaccuracy is where you create a false transaction to cover a non-existent purchase or disposal.
The penalty range it falls into depends on the type of behaviour and whether it was a ‘prompted’ or ‘unprompted’ disclosure
| Type of behaviour | Unprompted disclosure | Prompted disclosure |
| Reasonable care | No penalty | No penalty |
| Careless | 0% to 30% | 15% to 30% |
| Deliberate | 20% to 70% | 35% to 70% |
| Deliberate and concealed | 30% to 200% | 30% to 200% |
If you follow your accountant’s advice regarding a tax issue, (HMRC) will regard you as having taken ‘reasonable care’ to get things right and will not impose a penalty. if you have ‘used an accountant with the appropriate expertise, HMRC would normally consider this as having taken reasonable care’ unless you do not give them ‘accurate and complete information’.
7. The government is cracking down on cryptocurrency tax avoidance.
Cryptocurrency Tax Investigation
HMRC increase scrutiny on tax evasion and in the Budget 2020: extra funding has been pledged to crackdown on tax evasion targeting to collect additional tax revenue of £1.bn a year in the next 5 years.
HMRC plan to investigate cryptocurrency investors in a bid to crackdown on tax evasion. Last year HMRC has asked some of the biggest cryptocurrency exchanges, including Coinbase, CEX.IO and eToro, for details about their customers.
HMRC has opened a contract to procure a cryptocurrency and blockchain analysis software. The HMRC has plans to use this software in its campaign to combat cryptocurrency tax evasion starting February 2020. HMRC opened a £100,000 licensing contract to acquire an analysis software to monitor and trace cryptocurrency transactions.
An audit and tax investigation, which is a huge time investment (and an even bigger hassle). Tax investigations can be very stressful and even a basic investigation can drag on for months. An HMRC investigation can happen at any time. With the exceptional increase in cryptocurrency value last year HMRC is specifically targeting cryptocurrency users to increase the tax revenue. So far there are no case laws relating to cryptocurrency, therefore there is a high chance your tax investigation may result in HMRC taking you to court to set precedent for other investors.
Basically, tax mistakes are costly from every angle—from a time perspective, from an energetic perspective and from a financial perspective.
A tax professional knows the ins and outs of filing taxes; it is literally their job. And while they are certainly not immune to making mistakes (they are human, after all!), the chance of a tax specialist making a mistake on your taxes is significantly lower than if you went the DIY route. If you have utilised an accountant or tax advisor to complete cryptocurrency tax return. HMRC will considered that you have taken reasonable care, so most likely you will not be penalised.
Tax professional can also provide tax investigation insurance cover which can protect you from any additional cost which you may have to incur in case of any tax investigation by HMRC. This will provide peace of mind.
8. Cryptocurrency Money Laundering and counter terrorism financing compliance.
Cryptocurrency money laundering
Financial Action Task Force (FATF), global regulatory firm, has said it will boost its examination of digital currencies with an eye on money laundering. That may lead to draft rules and greater oversight than has been seen to date. From January 2020 in UK The FCA is now the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for businesses carrying out certain cryptocurrency activities under the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs 2019 amended) . Crypto companies and exchanges will be registered and will be required to report suspicious transactions, and to perform KYC checks on customers.
As part of compliance you may need to provide KYC and proof of source of fund for your cryptocurrency gain or investment to the bank or exchanges. If you have not reported your cryptocurrency activities or not utilised a cryptocurrency accountant to audit and review your cryptocurrency transactions your bank or exchange may flag to authorities that your transactions are treated as suspicious activities under AML compliance.
If your cryptocurrency tax affairs are handled by a qualified tax professional, then you can provide independent confirmation that your cryptocurrency activities are legitimate investment activities and relevant tax and AML compliance requirements are taken care by qualified tax professionals.
Doing cryptocurrency Taxes, Yourself or hire a Pro? Is the question
Doing Taxes, Yourself Is Your Call—but Come Tax Time, Consider What’s Right for Your
Bottom line? If you feel strongly that you want to manage and file your own cryptocurrency taxes, you can certainly go down that route. But keep in mind that, doing taxes yourself is a big job in protecting the wealth your accumulate from your crypto investments, and if you’re going to do them, you need to dedicate the time, energy and resources into getting them done right. If not, it is in your best interest to partner with a specialist cryptocurrency tax professional.