Crypto asset tax software is developing quickly, and some providers are further on than others in terms of the flexibility of their product, its ability to cope with the multiplicity of exchanges and types of transaction, transaction volumes and general usability.
But the crypto space is ever evolving, and so the need for constant investment, the skills to interpret the transactions with regard to how the tax laws apply in different jurisdictions and then write the software to deal with that calls heavily on a small pool workforce of highly specialist individuals.
Identifying fraudulent coins is also an issue, as these can clog up some of the data. This is particularly an issue on chains where the gas fees are lower, and not so much on the more expensive chains, as sending them out is too costly in those situations.
And what of "off-chain" transactions? How are these being captured in and around staking and are they consistent with the economic reality of the transaction?
There are instances where we would say they are not being captured, and if they are then the reality is different to the treatment assigned by the tax rules that are believed to apply.
For example, handing an asset to an agent to stake may be treated as a disposal. Since the UK treats crypto assets, including tokens, as property assets this may generally treated as a chargeable disposal.
But that may not be the economic reality, which is that the asset is being "loaned" to someone to generate an income or return and that asset is returned at the end of the committed timeframe.
Depending on the contract that is put in place, the tax treatment can be affected, and it is possible a lay person would interpret the transaction differently to how HM Revenue & Customs would suggest it should be treated.
In the UK, crypto asset owners are required to retain records of their holdings and transactions for tax purposes together with information to support their tax position.
However, the decentralised and pseudonymous nature of blockchain technology poses challenges that have led in the UK, rightly, to increased efforts to improve scrutiny and to ensure crypto owners fulfil their reporting obligations, but this is has resulted in some confusion and anxiety within the crypto community.
HMRC nudge letters have led to many individuals being informed and coming forward to review and declare their positions, but there are likely many more who have either not yet been reached or who have decided to try and remain under the radar.
