HMRC has begun sending ‘nudge letters’ to those it suspects of failing to pay the correct tax on their crypto gains – with further letters to follow in September.
The ‘One to Many’ letter from HMRC warns recipients that if an assessment concludes that there is additional capital gains tax or income tax to pay on previously undisclosed crypto gains, there may also be interest due on any late payments as well as penalties to pay.
Accountancy firm BDO flagged in a statement on 8 August that the tax treatment of crypto assets can be complex. However, in simple terms HMRC sees the profit or loss made on buying and selling of exchange tokens as within the charge 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.
For individuals, this means that if you have sold crypto for a profit during the tax year, you may have reporting and tax obligations, and need to consider whether you need to file a tax return.
BDO has warned that this letter is targeted at those the tax authority knows have ‘disposed’ of crypto assets. Such disposals will include circumstances in which people have exchanged one cryptocurrency for another or paid for a product or service using cryptocurrency.
Several years of unpaid tax may be payable and, depending on the reason why it is undisclosed so far, HMRC can have up to 20 years to assess additional tax.
Last year, HMRC launched a new campaign to encourage people to come forward and disclose any unpaid tax on crypto assets such as exchange tokens, NFTs and utility tokens – the first time the tax authority had introduced a specific disclosure process for those owning crypto assets.
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% of the tax due – or more if the holding was based offshore.”
HMRC already receives data from cryptoasset digital platforms about the transactions of those buying and selling crypto currencies or other assets on request. In future, they will receive this information automatically under the Crypto Asset Reporting Framework.
