HMRC have been keen to ensure that all individuals and businesses are paying the correct levels and amounts of UK tax on their cryptocurrency and other crypto assets. So if this is you, it is vital that you are aware of your tax obligations.

Investing and trading in cryptocurrency has become increasingly popular over the last few years, the tax treatment of any profits made through these activities is poorly understood. Some people, mistakenly, completely unaware that taxes exist of these. As there is now potentially huge sums of money involved, this has raised the profile of crypto to HMRC.

HMRC to issue ‘nudge’ letters

HMRC will begin issuing ‘nudge’ letters to crypto investors, which will warn them to check that their crypto transactions have been properly reported and that tax is being correctly calculated and paid. The letters will be used to encourage investors to examine whether they have paid the correct amounts of capital gains tax (CGT) and income tax on their crypto investments.

HMRC may believe large amounts of CGT and income tax generated from these types of investments are not being declared for tax purposes. There is likely an increasing amount of hidden wealth thanks to the rise of cryptocurrency, with many investors holding the mistaken belief that HMRC is unable to find out about their investments and any gains that they have made.

However, HMRC has the ability to gain a full list of cryptocurrency holders by sending data requests to UK-based cryptocurrency exchanges and other financial institutes. Investors should come forward and declare their crypto income, as those later found to have misreported their crypto could face prosecution.

HMRC now has an internal manual dedicated solely to the tax treatment of cryptoassets, which was last updated in April 2021. A link to this can be found here: https://www.gov.uk/government/publications/tax-on-cryptoassets

HMRC does not consider cryptoassets to be equivalent to currency or money, and therefore treats them as traditional assets for tax purposes. HMRC considers that investment in crypto is not analogous to gambling (and such that any profits made on investment in crypto would not be taxable). For investment in tokens (such as Bitcoin and Ethereum), any capital gains are therefore in principle within the scope of CGT.

We understand that included in HMRCs guide on how to tax crypto, it mentions that the location of the crypto currency is reviewed, including where the beneficial owner is resident.

If you need further detail please get in touch with your usual NR Barton advisor, or contact reception on  01942 242245.