Crypto tax nudge letters from HMRC – what to do if you get one

Crypto tax nudge letters from HMRC – what to do if you get one

By Published On: 6 February 2024Categories: crypto, HMRC, Tax

Since it’s inception in 2009 crypto currency’s popularity has grown and grown, with many people dipping their toes in to see what financial gain they can make from their investments. With some making a hefty profit in a short space of time, it’s fast becoming one of the most popular ways to invest.

But as with any profit-making scheme there’s tax to be paid, and HMRC have quickly realised that any money made from such investments needs to be managed accordingly. In this blog we look at the content in the crypto tax HMRC ‘nudge’ letters that’ve been sent out, and what to do if you get one.

What are HMRC nudge letters?

If HMRC have reason to believe you’ve made undisclosed profits on cryptocurrency and therefore owe tax, you may have received a ‘nudge’ letter. In total to date HMRC have sent out 8,329 letters, and they’ve been busy collecting data from crypto exchanges for the past three years to obtain this information.

Some individuals who own crypto may not even be aware they owe Capital Gains Tax on the sale of their digital assets, or if HMRC consider them to be ‘crypto traders’ then they’re subject to also paying income tax on their holdings. You may also be subject to paying tax if you mine cryptocurrency, get interest from ‘staking’ your crypto, receive any airdropped crypto, or trade large amounts on a regular basis.

With a predicted 4.97 million people in the UK owning some form of cryptocurrency as of 2022, HMRC will be keen to get in touch to target crypto as a source of tax revenue.

What do the HMRC nudge letters say?

Firstly they indicate that you either hold, or have held investments in cryptoassests, and that the following three main instances may show where a taxable gain has occurred:

  1. If you are / have traded cryptocurrency – ie if you were to sell your crypto assets for a higher price then you paid for it
  2. If you swap one type of cryptocurrency for another
  3. If you use your cryptocurrency to purchase something

These three points are examples of crypto disposals. Point one is a traditional disposal, whereas the second and third are the examples which HMRC want to raise the most awareness about. In both examples it’s deemed that cryptocurrency has been sold at the point where a transaction has been made, and because of this, either further crypto or something purchased has been received by the individual. The usual Capital Gains Tax rules would apply to both scenarios.

How do you know how much tax is due?

Receiving an HMRC nudge letter doesn’t automatically mean you’ll owe tax, but it is worth considering whether you need to report any gains or losses. The annual exempt amount for Capital Gains is £6,000, reducing to £3,000 as of April 2024. If you have net gains above this in any given tax year, then you will need to report it to HMRC via a self-assessment tax return. Note that if your proceeds exceed £50,000, but your gains are below the annual exempt amount, you’ll still be required to report your gain.

Our cryptocurrency experts will be able to assist you on this, or for more information on the crypto tax owed, take a look at our blog – Do you owe tax on your cryptocurrency?

What’s the next step?

It’s believed that the nudge letters will be followed by enquiry letters in HMRC’s tax authority campaign against unpaid crypto tax. Enquiry letters will request more in-depth information about taxpayers and their cryptocurrency holdings, and with the combination of HMRC gaining greater access to data, it will be increasingly harder to evade their attention.

Moving forward investors must be aware of how much tax they’ll need to pay when dealing with crypto, or expect a heavy penalty on top of the tax they’ll already owe.

How can Vantage Accounting help?

Crypto can be confusing, and understanding when to pay income tax on crypto assets is best left to the professionals. The expert tax team here at Vantage Accounting can ensure you’ve paid the correct amount of tax, and help you understand your position moving forward. For more information on how the Vantage tax team can help you, get in touch today or take a closer look at our crypto services page.

Note: All the information and advice in this blog post was correct at the time of writing.

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