This month will see HMRC issue “Educational Nudge letters” aimed at UK investors in the crypto market. The letters will ask taxpayers to check they have reported crypto gains correctly and paid the right amount of capital gains tax, or in some cases, income tax.
These letters represent another targeted campaign by HMRC, this time focusing on what they perceive to be significant hidden wealth associated with such investments. They have utilised information gathering powers available to them, to demand lists of crypto investors from various exchanges and have received names, addresses and value of crypto assets held by individuals both inside and outside the UK, for the tax years 2017/18 to 2019/20.
It is well documented that significant gains were made by crypto investors during these boom years, for example one of the most popular currencies, Bitcoin grew in value from around $1,000 to $20,000 per token. HMRC understandably want to ensure that such gains are correctly reported and tax is paid.
UK Tax Reporting Requirements
Many investors still incorrectly believe that gains are not taxable, but they are subject to UK tax and must be reported.
HMRC have taken steps over the course of the last few years to address this widely held, but incorrect perception of tax exemption, by issuing publicly available policy guidance, followed by their updated and comprehensive Crypto assets Internal Manual.
Capital Gains Tax (CGT)
Disposal of crypto asset exchange tokens (ie cryptocurrency) is subject to CGT. In addition to sales, there may be reportable gains associated with:
- Exchange of tokens for another type of crypto asset
- Use of tokens to pay for goods or services
- Gifts (other than to partner or spouse)
The same CGT matching rules that apply to sales of shares, also apply to cryptocurrency and this can lead to some unexpected results for tax purposes which can be complex to manage tax efficiently.
In most cases investors hold crypto currency as a personal investment for an expected capital appreciation. CGT would therefore apply as mentioned above.
In some rare cases, crypto assets are used to carry on a financial trade or business and profits would then be subject to income tax. The same income tax approach and potential national insurance liability would apply to receipt of new crypto assets paid from employers, or via “mining”, transaction confirmation or airdrop allocations.
Crypto asset terminology, some of which is mentioned above, can also vary considerably across types of coins, tokens and transactions and it is important that investors and professional advisors are familiar with same.
What to do if you receive an Educational Nudge Letter regarding your crypto investments?
If you receive a nudge letter from HMRC is does not necessarily mean you have made an error on your tax return, nor are required to file a tax return assuming one hasn’t been submitted. It is however, important that you do not ignore this and if necessary, seek appropriately qualified professional advice to help check and ensure historic reporting is indeed correct. Penalties for inaccurate returns or non reporting are severe, particularly if there is an offshore connection.
We are perfectly placed to help you with any tax advice connected to crypto assets. We can also provide specialist advice connected to all types of HMRC Investigations, Disputes and Disclosures. Our inhouse, cross service, experienced team, can provide this bespoke advice, utilising all guidance, legislation and case law to achieve the best results possible.
If you would like more information or assistance please contact Lynn Gracie, Private Client Tax Director, or your usual AAB contact.
Find out more about our Private Client Tax service here