Crypto remains a popular investment, with HMRC’s interest in crypto investors continuing to rise. On 10 November 2023, the UK agreed a joint statement with 48 countries to help combat criminals using crypto-assets to evade and avoid billions in missing tax.

The Crypto-Asset Reporting Framework (CARF), led by the UK, is the Organisation for Economic Co-operation and Development (OECD)’s latest flagship tax transparency standard. It is expected to take effect from the start of 2027, and crypto platforms will share taxpayer information enabling the authorities to exchange information and ensure tax compliance. More information can be found here.

Currently HMRC is tackling crypto tax compliance with the use of nudge letters. Even with the amount of noise being created around crypto, some taxpayers don’t realise that their crypto investments are taxable. In order to mitigate potential penalties, it is important for crypto investors to understand the best course of action to take following a ‘nudge’.

Nudge letters

Nudge letters are a standard HMRC communication sent to many taxpayers who it believes have a UK tax obligation, reminding them to review their affairs and respond accordingly. The communications are based on detail held by HMRC, such as information on UK users from crypto exchanges.

If you receive a nudge letter regarding crypto investments, complete a thorough review of your tax affairs, to ascertain if a disclosure to HMRC is necessary.

It is key to remember a nudge letter is not a statutory enquiry; however, it is best practice to respond to HMRC in writing within the deadline set. This does not necessarily mean signing and returning the certificate of tax position enclosed.

If you’re required to make a disclosure to HMRC, it’s best to seek professional advice, not only to guide you through what can be a stressful process, but to also mitigate any potential penalties.

UK tax treatment of crypto

In most cases, trading in crypto is considered an investment and is liable to Capital Gains Tax (CGT), in the same way that transactions in shares and securities are. A gain is calculated as the excess of the sale price, after deducting the sale and purchase costs.

Each tax year, an individual has a CGT Annual Exempt Amount (AEA) to utilise against net gains – currently £6,000 for the 2023/24 tax year. The current CGT tax rates applicable to these transactions stand at 10% for basic rate taxpayers, and 20% for higher rate taxpayers – both are considerably lower rates than Income Tax.

With the value of many cryptocurrencies rising over recent years, a taxpayer who initially invested a small amount of money could be facing a hefty capital gain once a disposal is made. Furthermore, multiple cryptocurrency transactions in a year, including the reinvestment of sale proceeds, are likely to trigger a capital gain.

For example, if an individual bought Ethereum using Bitcoin, a disposal of Bitcoin would have been made and the gain on disposal would need to be calculated. An individual may make many such transactions in one day, and an accumulation of these transactions over a tax year could easily lead to gains exceeding the AEA.

In this situation, if HMRC discovers any liability, penalties and interest charges will arise. The penalty rates will be significantly higher than in cases where a voluntary, unprompted disclosure is made i.e. approaching HMRC before HMRC contacts you. However, there are some circumstances where crypto transactions will be treated as a trade and liable to Income Tax. Such tax treatment does not apply to investors and depends on a range of factors, such as receiving crypto as a form of payment, mining or staking.

It is therefore important to ensure you fully understand your tax position. The biggest issues typically arise for those who haven’t sought professional advice, and with limited awareness of UK tax rules around crypto assets, we could well see further problems arising for many taxpayers in the future.

What if I can’t pay my tax bill?

Investors who have made gains on their crypto activities may have reinvested and not received the cash. In some cases, following a year of significant gains, significant losses may arise – it is worth noting losses from a later year cannot be offset against earlier gains. In these situations, the taxpayer may not have the funds available to pay their tax bill.

This should be communicated with HMRC and a payment plan must be agreed prior to the liability becoming due for payment.

For those invested in crypto and who haven’t received a nudge letter from HMRC, it is advisable to take professional advice now to ensure your tax compliance is up to date. Approaching HMRC before they approach you will provide you with the best possible outcome.