• Price of one Bitcoin rose to $16,000 in 2017
• Rise in value creating tax advisory demand
A decade ago, Bitcoin, Ethereum, and Litecoin may have sounded to most people like arcade games.
Today, though, these crypytocurrencies are valued together at almost $200 billion—and they’re increasingly becoming a source of business for some of the U.K.’s tax and accounting firms.
“Unlike many accountancy firms in the U.K. we are taking on cryptocurrency tax clients,” accounting firm Rawlinson Pryde & Partners says on its website. The Bedford, central England-based firm adds it receives requests most days seeking help over tax compliance with cryptocurrencies.
Smith & Williamson, one of the U.K.’s top 10 accounting firms, similarly advertises bespoke tax services for cryptocurrency in a post that cites a burst of recent activity in the area.
“After speaking to our existing and potential clients, we realized that there was a real interest in these sort of services,” Tom Shave, a London-based partner at Smith & Williamson, told Bloomberg Tax. “As long as we’re working with reputable companies, it’s a new form of business for us.”
The eye-popping rise in virtual currencies’ value has largely driven this growing interest for cryptocurrency tax services. Between 2010 and 2017, the value of a single Bitcoin rose from one cent to $16,000. As a result, cryptocurrency users have ended up with significant untaxed gains or income—or both.
Bad Tax Planning
Shukry Haleemdeen, founder of mycrpytotax.co.uk, is another U.K. practitioner offering tax services on the topic. Setting up his own accounting firm in 2014, he originally expected to focus his work around the U.K. government’s efforts to introduce a digital tax system. But then came the Bitcoin boom.
“We had an increasing demand for cryptocurrency services, so we created a separate platform, and we’ve now got between 30 and 40 clients,” Haleemdeen told Bloomberg Tax. “Most people who’ve made a lot of money from cryptocurrencies have failed to take proper tax planning advice.”
Bitcoin, the flagship cryptocurrency, emerged following the 2008 global financial crisis as part of an electronic, secure payment system that is independent from central banks and governments.
Now, you can buy houses with bitcoin, and the Hong Kong branch of global accounting firm PwC even accepts payment in the cryptocurrency for its advisory services. The main focus on cryptocurrency, though, is around buying and selling them on exchanges like San Francisco, Calif.-based Coinbase.
Those making big money through these platforms will have to pay some form of tax.
Day-to-day users are more likely to have their trading profits taxed at income. By contrast, those buying and selling on less regularly will, like most stock market investors, face capital gain taxes. With income and capital gains respectively taxed in the U.K. as much as 45 percent and 20 percent, the nature of the activity can determine significantly different tax liabilities.
However, in technical guidance published in March 2014, HMRC said that some transactions may be so highly speculative that they aren’t taxable at all, and nor would tax relief be available on losses. The guidance adds that HMRC will review each use of cryptocurrency on a case-by-case basis.
“HMRC definitely hasn’t given guidance that says, ‘If you did this, and then buy and sell, you’re going to be liable to X. If you hold it, conversely, you’re liable to X,’” Richard Sham, tax department director at London-based accounting firm Wisteria, told Bloomberg Tax. “As more guidance comes out on the issue from HMRC, more businesses will probably get involved” in using cryptocurrencies.
Most recently, HMRC has been exploring new guidance on how businesses can raise capital in the U.K. for a new cryptocurrency, a process similar to companies issuing shares on a stock market.
Known as initial coin offerings, this form of raising capital is Smith & Williamson’s main focus, contrasting to smaller accounting firms’ work with individual users. With more than $5 billion dollars of capital raised worldwide in 2017, ICO advisory work could certainly be lucrative.
“We’ve seen over the past year that businesses are raising money in a new way, and we recognized there must be some tax issues around here,” said Shave, who specializes in financial services. “With individuals, there’s a real disconnect between using cryptos and having to pay taxes on them, and then certainly in the ICO space there are a lot of businesses which are uncertain around taxation.”
The cryptocurrency craze, then, looks set to continue throughout the rest of 2018—and beyond.
This year alone, countries including Ireland, Poland, Israel, and South Africa have published new guidance on the topic. The U.K. government launched a taskforce in April, moreover, to explore the possible benefits and challenges of cryptocurrencies for the country’s financial sector.
However, while they certainly create potential benefits, cryptocurrency also poses a number of risks.
In March, the Group of 20 finance ministers said that cryptocurrencies can create opportunities for tax evasion and money laundering. In addition, the volatile valuations of the digital currencies can cause financial trouble for users whenever they face capital gains taxes from crypt-to-crypto transactions. Today, the purchase price of one Bitcoin alone is less than half it was at the start of this year.
Perhaps due to these risks, some tax practitioners are slightly skeptical about the future of cryptocurrency.
“Overall, we’ve had things like film investment schemes as a fad in the past – and the latest one is cryptocurrencies,” Lisa Spearman, partner at U.K. accounting firm Mercer & Hole, told Bloomberg Tax. “There’s also no great mystery about taxing them. You’ve just got to apply basic principles.”
One day, cryptocurrencies may well be seen as simply an investment fad. For the moment, though, there’s little mystery around how U.K. accounting firms are benefitting from the likes of Bitcoin.
“As a tax adviser, you can bring so much value to your clients if they haven’t sought advice before,” said Haleemdeen. “In a year’s time, hopefully — who knows? — maybe I’ll have as many as 100 clients.”
(Updated with additional comment)