Interview: What is a taxable event in crypto? Andersen LLP

The world of cryptocurrency is a new one. Bitcoin was only launched in 2009, and it is only in the last few years that the sector has made inroads onto the mainstream stage. With that in mind, tax legislation in the sector is misunderstood by many.

If you are a citizen of a non-USD country and you buy a USD stablecoin, only to sell it the following year after the dollar has increased in value against your local currency, is that a taxable event? If you swap between different cryptos, are those events taxable?

We put some of these issues, and other commonly floated questions, to Dion Seymour, crypto & digital assets technical director at Andersen LLP, a tax consultancy firm based in the UK which has a specialist crypto team. 

Interview with Andersen LLP

Invezz (IZ): Do you agree with the criticism sometimes levelled at crypto that it makes it easier to evade tax? 

Dion Seymour (DS): Yes and no.

Certainly the perception is that as cryptoassets are anonymous and it is impossible to link their use to real world identity. Also, due to the niche nature of cryptoassets, it is true that some tax administrations have taken time to catch up.

However, reality differs from the perception. As cryptoassets are actually pseudonymous, they can be linked to real world identities, with the blockchain providing an immutable record of their activities. Tax administrations and other law enforcement agencies have also been rapidly catching up, increasing their understanding and deploying forensic tools that enrich the tracking and tracing on the blockchain. Some high-profile cases have shown that law enforcement agencies are exercising their ability to pursue.   

UK crypto tax laws

IZ: Do you think UK crypto tax laws (and regulatory regime in general) are prohibitive, lax, or in between when compared to other nations?

DS: The UK approach has been to treat cryptoassets as another asset class. In this way, their approach has been neither directly beneficial nor detrimental to those owning crypto. HMRC has also published some of the most detailed guidance of any tax administration globally. By treating cryptoassets and other existing assets in a similar manner and providing guidance, this has provided a degree of certainty as to how they will be treated by HMRC.  

There is a question as to whether the UK is moving fast enough in providing clarity or being sufficiently innovative. Some jurisdictions are seeking to provide tax breaks for either individuals owning or certain businesses using cryptoassets, all whilst the biggest tax focus in the UK remains on the treatment of DeFi. . 

IZ: You have said many crypto users don’t realise that they create taxable events by trading from one stablecoin or cryptocurrency to another, even if no money is withdrawn. Do you think this will change in the future, as it seems like this is making using crypto regularly extremely onerous? 

DS: HMRC’s own market research showed that only a quarter of individuals that own, or had owned, crypto had read their guidance.  

A commonly held misconception is that as crypto has not been converted to fiat money, it isn’t taxable. Unfortunately, this is not the case and based on what we have seen from the government’s latest direction, I think it is unlikely that this will change any time soon. 

How has the bear market affected the tax sector?

It is difficult to mention crypto without delving into the bear market, as the last eighteen months have ravaged the sector. Despite a rebound thus far in 2023, prices, trading volume and capital in the space remain far below pandemic highs. 

IZ: Being a tax consultancy within the area of digital assets is very unique. Have you noticed a dropoff in interest, especially from institutions, as capital has flowed out of the space over the last year?

DS: It is certainly a unique position. We are fortunate to offer a high level of service across accountancy and multi jurisdictional taxation within the digital asset space that very few other firms are able to. The last year has been difficult for some firms and we have been working with some major platforms to assist them with their tax affairs. 

Despite the current market conditions there is still considerable interest in this space and exciting projects are still happening. The industry will take some time to recover but the crypto sector develops in ebbs and flows and it seems that the sector is picking up again. For example, there has been considerable interest in Bitcoin Ordinals which has increased transactions in bitcoin and innovations like this energises the industry. 

IZ: The US regulatory climate has become extremely hostile towards cryptocurrency companies over the past six months. Gary Gensler and the SEC have slammed the sector for “mass non-compliance”. Do you agree with this sentiment, from your position of working within the areas of tax, corporate structure and compliance?

DS: I think that the starting point here is a question as to what non-compliance looks like. It seems that from the perspective of Gary Gensler and the SEC, there is significant non-compliance as it is unclear what cryptoassets are a security. Indeed, Coinbase has attempted to seek further clarity, which the SEC has declined to provide. When the SEC then seeks to prosecute a firm, the perception in the press is that this is a non-compliant sector. What might be missed are the efforts to understand the position of the SEC.

Globally, the position on cryptoassets can be confusing, with a myriad of differing approaches from regulation to taxation due to differences in law. For example, the SEC often cites the “Howey test” for determination of what makes a security, but this is not a concept used in the UK or Europe.

Education is key here. A lot of non-compliance could be called “involuntary non-compliance” where the person is unintentionally at fault.  

CBDCs

IZ: You do a lot of work with stablecoins. Do you think a potential CBDC in the UK, or elsewhere, could have implications for stablecoins?

DS: The development of CBDCs will often be linked to stablecoins which started when Meta (then Facebook) launched the Libra consortium. This was met with resistance across the globe and increased the pace of CBDC development. 

There is a lot of misunderstanding about what a CBDC offers and they are often compared with cryptoassets such as bitcoin and stablecoins. This is quite an unfair comparison as CBDCs, stablecoins and bitcoin all perform very different functions. There may be implications for the use of stablecoins, however, a CBDC will not be available on crypto trading platforms and with current uncertainty around CBDC compatibility they may also have limited application to be used for remittances. 

We have seen clients “caught out “ by non GBP based stablecoins, for example USDC and Tether, where the value of the pound has fallen in relation to the dollar. When the tokens are sold this can actually create a gain for tax purposes which needs to be considered.

If they were to use a GBP denominated token this would not only reduce the risk from the foreign conversion but also tax!