HMRC has started sending ‘nudge letters’ to those it suspects of failing to pay the correct tax on their cryptocurrency gains – with further letters to follow in September.
The ‘One to Many’ letter from HMRC warns that if an assessment finds extra capital gains or income tax owed on previously undisclosed crypto gains, recipients may also face interest on late payments and penalties.
HMRC considers the profits or losses from buying and selling exchange tokens as subject to Capital Gains Tax (CGT).
Its guidance says that only in “exceptional circumstances” will HMRC accept that buying and selling of crypto amounts to a trade for tax purposes.”
This means that if a person has sold crypto for a profit during the tax year, they may have reporting and tax obligations, and need to consider whether they need to file a tax return.
Accountancy firm BDO warned that this letter targets those the tax authority knows have “disposed” of crypto assets.
This includes cases where people have exchanged one cryptocurrency for another or used cryptocurrency to buy products or services.
Several years of unpaid tax may be owed, and depending on why it was undisclosed, HMRC can have up to 20 years to assess additional tax.
Paul Falvey, a tax partner at BDO said: “Many owners of crypto assets may not be fully aware of their obligations and may not have filed a tax return before. They could well get a shock when this letter hits the doormat – but the worst thing they could do is to ignore it.
“To bring their tax position up to date, individuals may need to source reports from their financial advisers or online platforms. In certain circumstances, those affected would do well to seek specialist advice on the most appropriate disclosure facility to use.
“If additional tax is due then HMRC could charge late payment interest and impose tax-geared penalties. These penalties can be up to 100 percent of the tax due – or more if the holding was based offshore.”
HMRC already collects transaction data from crypto platforms upon request and will soon receive it automatically under the Crypto Asset Reporting Framework.
Last year, HMRC launched a campaign urging people to report any unpaid tax on crypto assets like exchange tokens, NFTs, and utility tokens. This was the first time a specific disclosure process was introduced for crypto owners.
