- As per the Her Majesty’s Revenue and Customs (HMRC), the crypto exchanges operating in the UK will now have to pay 2% digital services tax.
- HMRC refused to recognize cryptocurrency exchanges as financial instruments as each one of them have different characteristics and features.
The UK is one of the leading countries in Europe when it comes to crypto transactions in the world. According to the Chainalysis report, the UK is way ahead when it comes to transactions, amassing US $170 billion (£123 billion) worth of deals in 2021. In fact, it is one of the biggest crypto trading partners for every other area, sending at least 25% of all value received by other regions, including 34% of value received by North America.
Amid the boom, the regulators have been vigilant keeping a tab on the exchanges and crypto trading in the country. It has been stricter on the exchanges who have been on the brink of violating the rules and often punished them for not following them.
How can taxing of crypto exchanges change things in UK
Therefore, it was not surprising to see Her Majesty’s Revenue and Customs (HMRC) introducing digital services tax on crypto exchanges operating in the country. On 28 November, the HMRC instructed the operating exchanges in UK, that they will be subjected to pay 2% digital services tax, which is part of the tech tax.
The tech tax, which was first imposed by the HMRC in April 2020, largely targeted the online search engines and social media websites. At that time, crypto exchanges were not a part of it.
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HMRC refused to recognize cryptocurrency exchanges as financial instruments at that time as each one of them had a different characteristic. The HMRC also didn’t recognize cryptos as commodities, financial contracts, or money. As a result, the exchanges failed to get the benefit from crypto taxation for online financial marketplaces.
The latest move can be a major blow for the crypto exchanges as with this the UK Financial Conduct can keep a tab on tax invaders. Many exchanges of late have been under the radar. While Binance was banned from operating in the UK, more recently, Kraken had to delist Monero for its UK customers. Besides, the regulators have been vigilant about the crypto deals and have asked exchanges to share customer and transaction details
The recent 2% digital service tax does come across as a major blow for the exchanges as many experts feel this charge could be passed on to investors and traders.
The FCA has been active and has spent around US$671,000 to hire experts from various blockchain firms to combat crypto-related crimes. Besides, it has also roped in third-party companies to provide services to keep a tab on illegal trading.
Taxes in other countries
Besides UK, South Korea has been vigilant about crypto taxation. South Korea’s National Assembly is all set to impose a 20% tax on crypto-trading gains from 2022, if everything goes as per its plan.
In US, the taxpayers have been asked to declare their crypto profits, while filing their taxes. Unlike UK, the IRS in the US has recognised crypto assets as property as compared to currency.
In India too, there are talks of taxing crypto exchanges and if the government bill is passed at the parliament next month, then the investors may have to declare their crypto earnings, which will call for taxation.
On one hand, we can say that FCA’s recent move is a great one to keep a tab on tax evaders and illegal deals and could be a warning call for the leading exchanges operating in UK to get their books in order.
On the other hand, the recent announcement could create problems for exchanges. But overall, with this, the regulators will be in a better position to protect investors’ interest.