HMRC Targets Cryptocurrency Investors with New Tax Enforcement Efforts
In a significant move, HM Revenue and Customs (HMRC) has increased its efforts to ensure cryptocurrency investors are paying the correct taxes on their profits. This week, HMRC began sending out “nudge letters” to individuals suspected of not reporting or underreporting their crypto gains. More letters are expected to be sent out next month.
Anyone who has profited from the sale of cryptoassets could have tax obligations and may need to file a tax return. Failing to do so could result in interest charges and penalties on any overdue taxes. According to HMRC, the rate of non-compliance in reporting cryptoasset holdings is estimated to be between 55% and 95%.
Tax Implications for Crypto Investors
Profits from cryptocurrency transactions—such as trading Bitcoin, Ethereum, and other digital assets—may be subject to various forms of taxation, including capital gains tax, income tax, and National Insurance contributions. The specific tax obligations depend on how the profits were earned.
Investors who have traded or sold cryptoassets for fiat currency could be liable for capital gains tax at a rate of 20%. If their total capital gains in a single tax year exceed the annual tax-free allowance, they must pay tax on the amount above this threshold. For the current tax year, the capital gains tax threshold is set at £3,000, down from £6,000 in the previous year.
In certain situations, income tax and National Insurance may also apply, particularly if the investor’s cryptoassets have generated income. For example, cryptocurrencies that allow “staking”—where assets are locked for a period in exchange for interest—are treated as income by HMRC and taxed accordingly.
Ignoring HMRC Letters Could Have Serious Consequences
Ignoring these nudge letters could lead to significant penalties. Many cryptocurrency owners might not be fully aware of their tax obligations, especially if they have never filed a tax return before.
Those receiving a letter should not ignore it and you may need to gather reports from financial advisers or online platforms to update your tax status. Failure to do so could result in late payment interest and penalties, which can be as high as 100% of the tax owed or even more if the assets were held offshore.
Crypto Firms Must Share Data with HMRC
Under the upcoming Crypto Asset Reporting Framework (CARF), developed by the Organisation for Economic Co-operation and Development (OECD), the process of HMRC obtaining data from cryptocurrency platforms will become automatic. This new framework, expected to be fully implemented in the UK by 2027, will require crypto service providers to collect and report detailed transaction information to tax authorities, thereby increasing transparency and helping to curb tax evasion.
HMRC anticipates that these measures will make it easier to identify and address instances of non-compliance among cryptocurrency investors.