United Kingdom Takes Steps to Better Regulate Cryptocurrency Transactions

Governments worldwide are struggling to keep up with how to regulate new decentralized online currencies as blockchain platforms become more prominent across financial networks. (David Tweed, Bloomberg). But even though an increasing number of investors utilize cryptocurrencies, many are still confused about how to treat virtual currency for tax purposes. (Kelly Phillips, Forbes). Recently, Her Majesty’s Revenue and Customs (HMRC), the government department of the United Kingdom responsible for the collection of taxes, opened a contract to procure software to help identify when cryptocurrency is used to avoid paying taxes. (David Canellis, TNW). 

There is no denying the wide-spread growth of cryptocurrencies in recent years, but governments and cryptocurrencies continue to have a tumultuous relationship. (Joe Liebkind, Investopedia). A recently published survey reports only 14 percent of the 216 global cryptocurrency exchanges are licensed by regulators. (Gideon Pell, Fintech). These results are not surprising considering regulatory and supervisory bodies around the world are still struggling to meaningfully regulate cryptocurrencies. Cryptocurrencies, which have surged in popularity, are often touted because they offer a way to avoid government oversight, but the entrance of cryptocurrencies from companies like Facebook and JP Morgan have legitimized the crypto world. (Michael Nunez, Forbes) 

The expediency and cost effectiveness of blockchain platform applications utilized in cryptocurrencies seem to indicate that cryptocurrencies are here to stay. (Joe Liebkind, Investopedia). Accordingly, regulatory agencies have tolerated a slow, yet substantial incorporation of cryptocurrencies into conventional financial services. (Id.). Governments in the United Kingdom and elsewhere are seeking crypto-tracking solutions to close “intelligence gaps” and increase monitoring to better identify the use of cryptocurrencies to avoid paying taxes. (David Canellis, TNW).

In December of 2016, the U.S. Internal Revenue Service (IRS) issued several summons demanding cryptocurrency platforms produce records of nearly 500,000 cryptocurrency transactions. (Ian Allison, Coindesk). In 2019, the IRS sent warning letters to over 10,000 Americans who they believe participated in virtual currency transactions but did not report them properly on their tax returns. (Id) The Australian government took similar measures collecting bulk records from cryptocurrency databases to ensure people dealing in cryptocurrencies are paying the correct amount of tax. (Allyson Versprille, Bloomberg) The United Kingdom followed suit -- recently taking similar action requesting user data from several cryptocurrency databases to cross reference with individual tax records. (Id.)

HMRC reportedly demanded transaction data from cryptocurrency platforms operating in the United Kingdom for the purpose of recouping unpaid taxes, although recent commentary implies tracking cryptocurrency transactions requires a stronger response. (Id.) In December, a Europol strategy analyst noted that top international regulatory agencies were struggling to track cryptocurrency transactions. (Id.). Although it is yet to be determined if additional regulatory measures will be effective, the response by the HMRC indicates the United Kingdom believes cryptocurrency is here to stay and that the transactions need governmental oversight.