Confirmed in the recent Budget, although first announced by the government on 10 November 2023, the UK is to implement the Organisation for Economic Co-operation and Development’s (OECD) Cryptoasset Reporting Framework (CARF).
The CARF is the framework within which cryptoasset service providers must comply with reporting requirements in relation to users around the world. The draft regulations have been published by HMRC as part of a consultation which will end on 10 January 2025.
The adoption of the CARF means that in addition to information from platforms within the UK, HMRC will receive information from overseas crypto platforms with UK users. International reporting under the CARF is to take place from 2027, however domestic reporting on UK users will take place from 1 January 2026.
Information that platforms will be required to provide under the CARF are details for all of their users, their transactions and also their held assets. Essentially everything HMRC would need to identify an individual and assess their UK tax position.
Why does this matter?
HMRC has always maintained a strong interest in cryptoassets, not least because of their opacity for users. Whilst HMRC first published their view of the tax treatment of crypto in December 2018, it has previously not had the information available to police this, however the CARF will be a game-changer in this regard.
From initially having access to no crypto information at all, in certain circumstances, HMRC already holds details of UK crypto users who have made disposals in respect of cryptoassets. We have already seen HMRC taking initial action on this information by sending nudge letters. We also expect HMRC may follow up on this with stronger action for those who bury their head in the sand and do not respond. These new measures will mean that rather than just having details of disposals in limited circumstances, HMRC will have full details of UK users of crypto including all transactions and details of their held assets.
HMRC’s interest relates to the huge potential for error and abuse by users of crypto. Many who have invested in crypto may have had no prior exposure to traditional investments and therefore are not aware of the tax rules which govern such investments or their reporting requirements.
For individuals, gains on crypto transactions will usually be subject to capital gains tax, with uncommon exceptions for those who are: paid for work by way of crypto; actively mining coins; or undertaking a trade in cryptocurrency, which would be subject to income tax.
Furthermore, the fluid nature of cryptocurrency is unlike any other investment, with the potential for inadvertent disposals for tax purposes, with the user none the wiser that their transaction has given rise to a taxable event, due to their lack of knowledge on the tax treatment.
A disposal is not only when a crypto asset is sold for flat currency, but also when a crypto asset is given away under certain circumstances, used to buy goods or services, or purchased using another cryptoasset. 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. Many are therefore likely to have a tax liability that they may not have been aware of at the time of the transaction.
This is especially relevant because of the huge hype around cryptoassets at times, which can cause volatility and potentially significantly amplified gains. For example, someone who invested even just a few hundred pounds in the early stages of Bitcoin prior to the summer of 2020 could have gains many multiples of their original investment. At the time of writing, we have seen Bitcoin hit record highs following Donald Trump’s US election victory. It is plain to see that due to the volatility, taxable gains have been generated by many, but crucially in many cases overlooked by those who should have reported them to HMRC.
What should I do?
Although the domestic reporting does not come into effect until 2026, if you have made investments or have traded in cryptoassets, we strongly recommend reviewing your affairs and taking action before this date, not least because HMRC has already begun receiving information on disposals, as we have mentioned. Our message is ‘act now, before it is too late’.
Once HMRC begins receiving information under the CARF there will be nowhere to hide, and this could also extend to earlier years. If HMRC use the information received to commence enquiries and discover that an insufficiency of tax in prior years, HMRC can issue discovery assessments to recover the lost tax. An assessment is a formal charge to tax issued by HMRC, which becomes final and payable if the assessment is not appealed within 30 days. In addition, we would expect HMRC will seek to charge penalties where a loss of tax is discovered; such penalties can be up to 100% of the tax if HMRC consider deliberate behaviour has led to the loss of tax, and up to 200% for an offshore matter.
If you have made relevant disposals, or are unsure whether transactions would be considered a disposal for tax purposes, we recommend you seek professional advice, in order to protect your position.
If you discover errors in your tax filings or identify that you should have reported taxable transactions in crypto to HMRC, a voluntary disclosure may be the best course of action. Approaching HMRC and making a voluntary disclosure before any letter is received from HMRC is strongly recommended, as such a disclosure would be considered unprompted. Unprompted disclosures will benefit from access to the lowest possible penalties, in some cases as low as 0%, compared to disclosures that are prompted by an action of HMRC. Interestingly, HMRC now has a dedicated disclosure service for cryptoassets, which shows it is expecting this to be a widespread issue.
Visit our Tax Disputes and Resolutions page to learn more of what our services can do for you.
