Global economic uncertainty and recent volatility in financial markets have boosted interest in trading cryptocurrency. However, the latest closure of a UK based crypto business, amid claims of fraud, is a fresh reminder of the risks of dabbling in this still controversial sector.
BTCMining Limited has been wound up by the Insolvency Service after an investigation of complaints made to Action Fraud from former customers in Estonia, Mauritania, Iran, New Zealand, Poland and Romania. The company claimed to operate a cryptoasset mining business, where customers would pay the company to mine crypto and receive any resulting income. In this case customers lost an initially identifiable £15,000, but investigators fear the total may be much higher.
Mining is essentially verifying the authenticity of transactions using complex computing, and then adding the transaction to the ‘blockchain’, or recognised public ledger. New cryptocurrency is issued and introduced into circulation as a reward for successful mining.
Investigators were unable to reach BTCMining Limited using known email addresses and telephone numbers, and websites linked to the company were either inactive or gave no new contact details. The company’s ability to attract customers globally was a particular concern for the Insolvency Service.
BTCMining’s demise follows the forced closure of UK ‘cryptocurrency academy’ Amey Finance, after allegations of a $1.7bn Ponzi scheme, and last year’s jailing in the US of crypto king Sam Bankman-Fried, for 25 years. But while many maintain there is a whiff of ‘Emperor’s new clothes’ about digital currencies, in the UK, it’s estimated that 6-7 million people – a tenth of the population – have tried their hand at trading 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 closely monitored 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 crypto asset 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 lower 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.
Written by Anoushka Desai, Senior Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.