Niall Hearty explains the approach HM Revenue and Customs is taking to those holding crypto assets.
The UK's HM Revenue and Customs ( HMRC) appears to be targeting those it believes are underpaying tax on their crypto assets.
As the UK's tax authority, HMRC has spent a number of years gathering information about the business dealings of crypto traders. It is now stepping up efforts to ensure they are paying all the tax they should.
HMRC has reportedly sent a total of 8,329 "nudge'' letters over the past two years to individuals it suspects owe tax on their crypto assets, reminding them of their tax obligations. These letters are likely – in many cases – to be followed by what are called enquiry letters, in which HMRC will ask for specific information about a taxpayer's crypto asset holdings.
Those who buy and sell crypto need to be aware of their obligation to pay capital gains tax on profits they make from the sale of such assets. If HMRC considers such a person to be a crypto trader, they may be liable to pay income tax if they mine cryptocurrency, gain interest from staking their cryptocurrency or regularly trade sizeable amounts of crypto assets, such as exchange tokens, NFTs (non-fungible tokens) or utility tokens.
Last month, HMRC made announcements encouraging people to disclose any unpaid tax on gains made from such assets. With this having been followed by news of the thousands of nudge letters, it appears that HMRC is intent on pursuing those looking to benefit from crypto.
Such people need to be aware that it will be hard to avoid attention from HMRC. The authority is now determined to identify those involved in crypto, learn about the gains they are making from the sector, collect the tax they owe and, if necessary, take action against them if they fail to pay it.
Some of those who find themselves targeted by HMRC may need to seek advice on how to respond to HMRC enquiries, in order to ensure they pay the right amount of tax and avoid penalties being imposed.
It is worth noting that two years ago HMRC published research showing that while 1 in 10 Britons held crypto assets, 60% of those possessing crypto did not understand the tax obligations they faced. It should also be noted that new rules came into effect at the start of this year, requiring crypto platforms to collect information about traders and make their first report to HMRC by 31 January 2025.
The tax authority will soon find it easier to pursue those not paying tax in relation to their crypto activities. Those involved in crypto need to respond accordingly.
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