This week sees a Crypto Leaders Symposium in London. It won’t just be a gathering of youthful fintech entrepreneurs in shorts playing video games during others’ speeches; it’s a serious, two-day summit of senior bank executives, lawyers, regulators and traditional market officials discussing the future of the cryptocurrency sector and its legitimate place in a modern global financial system.
The timing couldn’t be better, or worse, whichever way you look at it, coinciding with the spectacular collapse this week of the major US based crypto exchange, FTX. The business’s 30-year-old founder, Sam Bankman-Fried, was worth $26bn at one point, his wealth slipping to $10bn last month and, by the time FTX filed for Chapter 11 bankruptcy at the weekend, he was thought to have no material wealth. He may be in good company, since the filing indicates than approximately one million ‘investors’ may be owed money by FTX.
While detractors of digital currencies maintain there is a whiff of ‘Emperor’s new clothes’ about the whole thing, more have been sucked in than you might think. In the UK, it’s estimated that 6-7 million people – a tenth of the population – have dabbled in cryptocurrencies. So, what happens when crypto punters are, at best, sitting on theoretical losses they can afford to bear, or at worst, face personal bankruptcy because of their exposure? Having monitored for some time the yo-yoing of the major digital currencies, led by Bitcoin and Ethereum, HMRC is, unsurprisingly, up to speed with the tax treatment of crypto assets and liabilities. Nonetheless, risk remains for stricken holders hoping to mitigate their financial positions.
On the plus side, UK crypto investors can “bank” losses with HMRC to offset against future gains. Profitable disposals, as with other investments, attract capital gains tax at 20%. Sales at a loss, however, can offset future gains on other types of investments, such as shares or property. Losses need to be claimed within four years of the end of the tax year in which they were realised.
It is also possible to bank a ‘negligible value claim’ with HMRC when a crypto asset becomes worth ‘next to nothing’. No sale is needed and the window for carrying forward is indefinite. This rule also applies to ‘lost’ crypto assets, for example if a private key or password can’t be retrieved.
Fraud is different, however. Negligible value and capital losses are allowed if proof of holding at some point can be established; but not receiving cryptoasset tokens that were paid for are unlikely to be seen as a disposal since the individual still owns the stolen asset and has a right to recover it.
Employees of crypto businesses, or external consultants to those enterprises, may yet face a major risk if they are paid in cryptocurrencies. In such cases, individuals are subject to income tax on the asset’s market value at the time of payment. A subsequently bombed-out valuation may not deliver enough cash to meet the income tax liability. If there is no way of meeting the bill, there is a good chance that HMRC will seek a bankruptcy order.
Guidance from HMRC, including updates, is available here.
If you are a crypto investor facing bankruptcy, or a business in need of forensic accounting, asset tracing and other services to recover funds from a crypto-focused business, please don’t hesitate to get in touch with us at Buchler Phillips for a free initial consultation
Written by James Bryan, Restructuring Manager at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround boutique firm.