Crypto Assets and HMRC - 27th August 2024
HMRC is sending “nudge letters” to those it suspects of failing to pay the correct tax on their cryptocurrency gains, including those who have already disposed of assets. The tax authorities already collect transaction data from crypto platforms and will soon receive it automatically under the Crypto Asset Reporting Framework. Last year, HMRC introduced a specific disclosure process for crypto owners to report any unpaid tax on crypto assets.
The letter states that if an assessment concludes that there is additional capital gains tax or income tax to pay on previously undisclosed crypto gains, the investor may be liable to pay interest on late payments and other penalties. It is believed that the letter is targeted at those HMRC knows have 'disposed' of crypto assets.
The letter begins with the line: 'We're writing to you as our records show you have disposed of crypto assets. However, you haven't declared everything correctly. This means you may have tax to pay.'
The disposal of or receipt of crypto is generally treated the same as other common assets for tax purposes.
HMRC states in its letter: 'If you make a disposal of crypto assets, you may have to report them to us and pay Capital Gains Tax (CGT) on any gains that you make.'
The letter continued: 'Income tax and National Insurance contributions may be due where you were involved in crypto asset related activities that generated an income’
'For example, income from lending, staking and mining of crypto assets. This may also be due from an employment which resulted in an income paid in the form of crypto assets.'
The issue with taxing cryptocurrency gains is that a separate tax regime has not been introduced so the current capital Gains Tax (CGT) regime must be made to fit the circumstances of disposing of crypto assets. Even the definition of disposal may not accord with everyone’s idea. For example, disposals will include circumstances in which people have exchanged one cryptocurrency for another or paid for a product or service using cryptocurrency.'
It is likely that many crypto asset investors may not have appreciated this and hence have not believed they are liable to CGT.
As long ago as December 2018 HMRC issued a Guidance paper explaining that you might need to pay Capital Gains Tax when you:
- sell your tokens
- exchange your tokens for a different type of crypto asset
- use your tokens to pay for goods or services
- give away your tokens to another person (unless it’s a gift to your spouse or civil partner)
There is an internal HMRC Crypto Assets Manual.
As mentioned, crypto assets are generally treated the same as other assets and HMRC will only accept that the buying and selling of crypto amounts to a trade for tax purposes in exceptional circumstances.
For those convinced they have no crypto-related tax to pay, HMRC said: 'If you're satisfied that you don't have any crypto asset-related tax to pay, please contact us using the details shown later in this letter. To support this, we ask that you include information that shows why you do not have to pay tax on your crypto asset activities when you contact us.'
Many owners of crypto assets may not be fully aware of their obligations and may not have filed a Tax Return before. This is particularly the case as crypto investing is very popular with the younger generation.
To bring their tax position up to date, individuals may need to source reports from their financial advisers or online platforms. It is not generally thought that CGT schedules will be prepared by crypto platforms as they are often as a matter of course by conventional investment platforms. Many smaller investors will have made transactions using their mobile phones and unpicking this data may prove very difficult if not impossible years after the event.
Fortunately, until this tax year the CGT annual exemption was fairly generous and no doubt a number of the smaller investors will be able to rely on this to avoid the need to report and pay CGT. It is also worth mentioning that given the volatile nature of crypto prices there will be many who have lost money over the past few years. It maybe important to quantify those losses both to utilise them against other gains on the sale of non-crypto assets or to determine the financial attraction of another potential crypto asset investment.
The HMRC guidance states that you can deduct certain allowable costs when working out your gain, including the cost of:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a buyer or seller
- drawing up a contract for the transaction
- making a valuation so you can work out your gain for that transaction
You can also deduct a proportion of the pooled cost of tokens.
The guidance also states that you must keep separate records for each transaction including
- type of tokens
- date you disposed of them
- number of tokens you’ve disposed of
- number of tokens you have left
- value of the tokens in pound sterling
- bank statements and wallet addresses
- a record of the pooled costs before and after you disposed of them
The issue of valuing the tokens in pound sterling and reporting the gain in sterling is important and means that where applicable foreign exchange rates need to be known at different dates not just when the gain is crystallised.
If there is a need to report and pay CGT, you can either complete a Self-Assessment Tax Return at the end of the tax year or use the Capital Gains Tax real time service to report it straight away.
In certain circumstances, those affected would do well to seek specialist advice on the most appropriate disclosure facility to use.
If following a nudge letter, it is established that 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.'
Summary
Crypto asset taxation is an area that is evolving and maybe in the fullness of time will warrant its own special tax rules. In the meantime, anyone in receipt of a nudge letter needs to take action to regularise the position. HMRC will shortly receive information automatically under the Crypto Asset Reporting Framework probably leading to more nudge letters.
With the reduction in the annual CGT exemption, the prominence of crypto assets and the need for tax revenue HMRC may view the sector as one that merits special attention. Of course, any increase in CGT rates will only enhance HMRC attention. It would be helpful if the crypto platforms could inform investors of their obligations and indicate where further information can be obtained.