How the taxman is homing in on crypto

Our award-winning crypto writer discusses rebound potential and looming tax bills for crypto traders.

Bitcoin has punctured crucial support at $10,000 as tax demands and trade optimism, after the US delays tariff imposition on more Chinese goods, combine to suck the wind out of the putative 'safe haven' asset.

The leading crypto dropped to as low as $9,685 as it succumbed to selling pressure seen in other markets, with the exception of bonds and gold. That said, gold is pulling back from record highs today.

However, the bitcoin price has bounced hard off the 100-day moving average, currently trading at $10,085 on US exchange Coinbase (see chart below).

BTC/USD 1-day candles, Coinbase 15 August 2019. (Chart courtesy TradingView)

Reasons for the crypto the sell-off

Although well-trailed by global regulators –  and the direction of travel has been highlighted in successive reports here at interactive investor – the penny has finally dropped for some market participants that the care-free days of no tax payments and light to non-existent regulation are over.

How quickly sentiment can change, with tax fears now foremost and bitcoin's digital gold properties looking a little tarnished set alongside the original non-digital article. 

A store of value that is so volatile was always the paradox of the digital gold thesis. But the price could firm from here though, as prices under $10k have been seen as 'buy the dip' territory for a substantial number of market participants.   

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Hopes that the US-China trade dispute may yet be brought to a successful conclusion has also hurt the "yuan play", which would have it that Chinese investors are buying bitcoin as a hedge and to effect capital flight.

However, as the Hong Kong protests escalate, fears of a military intervention grow and Chinese suspicions about western interference intensify, it looks way too early to write off the yuan play. 

Indeed, Trump's latest tweet in which he seems to be offering to have a personal meeting with Chinese President Xi Jinping about Hong Kong is the exact wrong thing to do from a Chinese perspective, where Hong Kong is most definitely considered an internal matter.  

Meanwhile, bitcoin dominance (its percentage of overall crypto market cap) strengthens to 68.5% as altcoins (all coins other than bitcoin) take a hammering. 

Many are suffering 10% losses, such as second and third-placed coins Ethereum and Ripple's XRP, trading at $183 and $0.265 respectively.

Crypto's tax tantrum

Even before the recent G7 meeting in Osaka, Japan, global regulators in the form of the Financial Action Tax Force had made it clear regulation was coming, and issued their final guidelines. Those guidelines are for each country to implement how it sees fit, but the G7 countries set the standard. 

And then there's Facebook's Libra to throw into the pot – if nothing else, it has added renewed urgency to the regulatory engagement with crypto.

So, it looks like regulators are not waiting for those new rules to be brought in before they start to move on the entry and exit points into crypto from the fiat currency world (currency backed by government that issued it).

Specifically, the taxman is homing in on crypto exchanges.

The crypto price reversal has been partly set in motion by the Inland Revenue Service (IRS) in the US and HM Revenue & Customs (HMRC) in the UK cracking down on tax avoidance and evasion. 

But the global tax authorities acting in consort to claw back tax owed and to chase down evaders is just the opening shot from regulators.

Coinbase UK loses Barclays, delists privacy coin Zcash

Fears about where things could be headed erupted when it was revealed that top crypto exchange Coinbase had lost the banking services of Barclays, according to a report by crypto news outlet CoinDesk.

The setback for Coinbase only affects its UK customers. 

Coinbase was using Barclays to access the Faster Payment Scheme that allows Coinbase's UK customers to deposit and withdraw sterling funds instantly. Coinbase's has a new provider – ClearBank, one of the UK's new breed of 'challenger bank' start-ups taking on the countries major banking groups. 

ClearBank's alternative service is not up and running until “the end of the third quarter”. Withdrawals and deposits are now taking days to complete.

Coinbase's delisting of Zcash (ZEC) added fuel to the fire to the reasonable suspicion that, to some extent, a globally coordinated crypto clampdown was underway. 

Zcash is a so-called 'privacy coin' focused on protecting and preserving user anonymity.

Although Coinbase has not commented on the delisting of ZEC, it didn't stop people jumping to the assumption that this could be the beginning of a ban on exchanges listing ZEC and similar coins.

ZEC will be delisted from Coinbase on 26 August.

How much tax do I owe?

A key consideration for crypto asset holders is how far back the tax authorities in the US and UK might be planning to go for transaction records of crypto investors and traders. 

It has been suggested that the UK's HMRC may only be interested in the past two to three years history but others worry it could go back 10 years – back to the beginning so to speak.

If tax demands only cover the run up to the 2017 boom and bust and after, then many of the largest holders of bitcoin and beneficiaries of the most stratospheric gains will be safe.

However, such an approach might not deliver the bountiful harvest the tax authorities would expect, given that the losses seen in the 2017 crash could be used to offset tax liabilities.

On that, the current losses in altcoins will certainly be reducing liabilities for many taxpayers now scrambling to get their crypto tax affairs in order.

Crypto investors and traders in the UK are liable for either capital gains tax (CGT) or income tax. Those who have been holding for the long term and have made the occasional disposal will be liable for CGT on the profit. 

Those deemed to be traders will pay income tax.

Each taxpayer has a £12,000 allowance before they have to pay tax on capital gains. Also, a spouse or partner's allowance can be made use of to effectively double the tax-free capital gains allowance. If you have not disposed of your assets through sale or other means such as gifting, then there is no tax to pay.

The CGT rate is 20% for higher-rate taxpayers and 10% for basic-rate taxpayers. In the latter case the amount you pay depends on whether the gain breaches the basic rate income tax band. 

To meet expected tax demands some investors on both sides of the Atlantic may have been force-selling to raise fiat to meet expected tax demands.

In New Zealand the authorities this week announced that taxes can be paid in cryptocurrency in a major move by one of the advanced economies, notwithstanding its small size.

Useful links for UK taxpayers

The page on taxing cryptoasset is available here:https://www.gov.uk/government/publications/tax-on-cryptoassets

FCA guidance on Crptoassets is available here:https://www.fca.org.uk/publication/policy/ps19-22.pdf