Over the next month, crypto investors could be receiving vital letters from HMRC as part of the department’s latest attempt at cracking down on people paying the incorrect amount of Capital Gains Tax (CGT). Most investments are liable for CGT but cryptoassets in particular appear to be an area of high non-compliance as it can be subject to several forms of taxation.
HMRC estimates that 55% to 95% of crypto asset holders are paying the wrong amount of CGT. To combat this, “nudge letters” are being sent out this week and an additional batch is set to be sent next month.
People who have earned a profit from owning or trading crypto assets may need to file a tax return and report their earnings as the investments could be subject to not just CGT but also income tax and National Insurance deductions. These additional taxes depend on when, where and how the income was generated.
For example, staking crypto assets, an agreement to not trade or sell assets in order to earn interest vaguely similar to a fixed-rate savings account is regarded as income for HMRC and taxed accordingly. Additionally, disposing of crypto assets, or trading to another crypto or selling for another fiat currency, may be liable to a 20% CGT rate.
Paul Falvey, a partner at tax firm BDO, warned The Telegraph that the “worst thing” investors could possibly do right now is ignore these letters. Due to the complicated tax liabilities around crypto, he noted: “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.”
He advised investors to “bring their tax position up to date” by sourcing reports from their advisers or investing platforms. The expert highlighted that some could also find help in getting specialist advice on the “most appropriate disclosure facility to use”.
As well as being slapped with an unexpected tax bill, investors are also facing potential late payment interest penalties charged by HMRC which can be up to 100% of the tax due.
HMRC is working with crypto firms as part of the crackdown to make it easier to detect and fix instances of non-compliance. The department can receive data regarding user transactions from crypto platforms in a process that is set to become automated.
