by Danielle Ford, Partner and Head of Tax Disputes & Resolutions; and Riocard Hoye, Senior Manager, Haysmacintyre
With cryptoassets remaining a popular investment, HMRC’s interest in crypto investors has continued to rise, particularly via the use of nudge letters.
Many don’t realise that their crypto investments are taxable, and those who receive a letter from HMRC can find themselves caught unawares; to avoid a hefty penalty, it is important crypto investors understand the best course of action to take following a ‘nudge’.
What is a nudge letter and what should I do if I receive one?
Nudge letters are a standard HMRC communication sent to those 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 your crypto investments, the best first step is to complete a thorough review of your tax affairs, to ascertain if a disclosure to HMRC is necessary.
A nudge letter is not a formal enquiry; however, it is best practice to respond to HMRC in writing within 30 days of the communication. You should not sign and return 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 also to mitigate any potential penalties.
How are crypto investments taxed?
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: for the current tax year, this is £6,000. The current CGT tax rates applicable to these transactions stand at 10% for basic rate taxpayers, and 20% for higher rate taxpayers; 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?
In some cases, investors have made gains on their crypto activities without withdrawing the proceeds. Similarly, some can make significant gains in one tax year, followed by significant losses in the following year. In both situations, the taxpayer may not have the funds available to pay their tax bill.
If this is the case, it needs to be communicated with HMRC and a payment plan must be agreed, ahead of the liability becoming due for payment. Contacting HMRC first, allows you to take control of the process.
Ultimately, if you do find yourself nudged by HMRC, seeking professional advice from the get-go can help you avoid hefty penalties and further action from HMRC further down the line.