Publication featured in: The Times, Daily Mail
HMRC has sent a total of 8,329 ‘nudge’ letters to individuals suspected of owing tax on their cryptocurrency assets*.
HMRC has been collecting data on cryptocurrency investors from crypto exchanges for at least three years. It has now used this information to target with letters ‘nudging’ them to check whether they have paid tax correctly on their crypto holdings.
Some crypto investors may not be aware that they owe Capital Gains Tax on the sale of their digital assets, or even income tax on their holdings if HMRC deems them to be ‘traders’ of crypto. Traders could be subject to income tax if they mine cryptocurrency, gain interest from ‘staking’ their cryptocurrency, receive ‘airdropped’ crypto or trade significant amounts of it regularly.
HMRC will be keen to target crypto as a source of tax revenue with 4.97 million people in the UK believed to own some cryptocurrency as of 2022**.
The recent dramatic price rally in cryptocurrencies, with Bitcoin up over 140% in the past year, is also likely to have moved taxing crypto incomes and gains up the priority list for HMRC.
In December 2023, HMRC launched a voluntary disclosure mechanism encouraging crypto investors to inform the tax authority of any unpaid tax on income or gains made from their crypto assets. Anyone coming forward to declare unpaid taxes would receive a reduced penalty.
The UK is also part of an OECD-led programme which will oblige crypto exchanges to share customer information with national tax authorities from 2027, providing HMRC with even more data to target its investigations.
Neela Chauhan, partner at our London office, says that the ‘nudge letters’ are likely to be followed by a wave of ‘enquiry’ letters from HMRC – the next stage of the tax authority’s campaign against unpaid tax on crypto. These letters are likely to ask for specific information from taxpayers about their crypto holdings.
Says Neela Chauhan: “HMRC is only going to become more determined to intensify its tax crackdown on crypto investors in the next few years. As HMRC gains access to more data, crypto traders will no longer be able to evade the tax authority’s attention.”
“Non-compliance may arise because crypto investors do not know what tax they owe on their digital assets. While HMRC is willing to offer some forbearance in the short term, such as through its voluntary disclosure mechanism, it is unlikely to be so tolerant for long. Investors need to be fully aware of what tax they need to pay or they will be issued with a heavy penalty on top of the tax they already owe.”
It is important for crypto investors to get professional advice to clarify their tax position. The tax rules on cryptocurrency can be unclear, particularly on when an individual should pay income tax on their crypto assets.
Professionals can ensure that investors have paid the right amount of tax and will not be faced with severe penalties. If they do owe tax, professional advice can greatly help investors communicate with HMRC and minimise any penalty.
*Source: HMRC; for 2020/21, 2021/22 and 2022/23 tax years.
**Source: FCA
