Shortly after HM Revenue and Customs (HMRC) set out to clamp down on tax avoidance by forcing online sellers to file a self-assessment tax return at the end of the financial year, national accounting firm UHY Hacker Young warns that those holding and selling crypto assets could also be affected.
HMRC has already sent out 8,329 ‘nudge’ letters to individuals suspected of owing Capital Gains Tax on their cryptocurrency assets; according to UHY Hacker Young. The initiative comes after the UK signed up to the Organisation for Economic Cooperation and Development (OECD), bringing in new rules.
New tax rules will see digital platforms report the income that individual sellers are making using their sites. The OECD-led programme will require crypto exchanges to share customer information with national tax authorities from 2027, in a move that will provide HMRC with even more data to target its investigations.
The non-ministerial department of the UK Government which is responsible for the collection of taxes has also collected data on crypto investors from crypto exchanges throughout the last three years. It is now putting this information to use, targeting certain individuals with letters, ‘nudging’ them to check whether they have paid tax correctly on their crypto holdings.
Many crypto investors are not aware that they owe Capital Gains Tax following the sale of their digital assets, or even income tax on their holdings if HMRC deems them to be crypto ‘traders’. These traders could be subject to income tax if they mine cryptocurrency, gain interest from staking their crypto, receive crypto from ‘airdrops’ or trade significant amounts of it regularly.
HMRC will be keen to target crypto as a source of tax revenue with 4.97 million people in the UK believed to own some cryptocurrency as of 2022.
UHY Hacker Young also suggests that a hike in the value of cryptocurrencies, including Bitcoin rising over 140 per cent in the past year, is also likely to have moved taxing crypto incomes and gains up the priority list for HMRC.
HMRC to ‘intensify’ crypto tax crackdown
December 2023 saw HMRC launch a voluntary disclosure mechanism encouraging crypto investors to inform the tax authority of any unpaid tax on income or gains made from their crypto assets. Anyone coming forward to declare unpaid taxes would receive a reduced penalty.
Neela Chauhan, partner at UHY Hacker Young, suggests that the ‘nudge letters’ are likely to be followed by a wave of ‘enquiry’ letters from HMRC – becoming the next stage of HMRC’s campaign against unpaid tax on crypto. These letters are likely to ask for specific information from taxpayers about their crypto holdings.
Neela Chauhan explains: “HMRC is only going to become more determined to intensify its tax crackdown on crypto investors in the next few years. As HMRC gains access to more data, crypto traders will no longer be able to evade the tax authority’s attention.
“Non-compliance may arise because crypto investors do not know what tax they owe on their digital assets. While HMRC is willing to offer some forbearance in the short term, such as through its voluntary disclosure mechanism, it is unlikely to be so tolerant for long. Investors need to be fully aware of what tax they need to pay or they will be issued with a heavy penalty on top of the tax they already owe.”
With this in mind, UHY Hacker Young recommends that crypto investors seek professional advice to clarify their tax position. The tax rules on cryptocurrency specifically can often be unclear, especially regarding when individuals should pay income tax on their crypto assets.
Professionals can ensure that investors have paid the right amount of tax and will not be faced with severe penalties. If they do owe tax, professional advice can greatly help investors communicate with HMRC and minimise any penalty.