WITH CRYPTO NOT going away anytime soon, HM REVENUE & CUSTOMS (HMRC) is writing to individuals who may need to pay tax on the disposal of cryptoassets such as Bitcoin.
These letters – known as “nudge letters” – which began circulating in August 2024, are part of a broader initiative to address underreported income related to digital assets, urging taxpayers to voluntarily disclose any outstanding liabilities before facing more serious repercussions.
In today’s Shipleys Tax brief overview, we take a look at HMRC’s latest crackdown on crypto investors through these targeted nudge letters aiming to reinforce the message that crypto investors must remain tax compliant and dispel the widespread misconception that using cryptocurrency is a loophole to hide wealth from the taxman. So, why might tax be due and what should you do if you receive a letter?
… to reinforce the message that crypto investors must remain tax compliant and dispel the widespread misconception that using cryptocurrency is a loophole to hide wealth from the taxman.
Understanding the Nudge Letters
The recent nudge letters specifically target individuals who may have disposed of cryptocurrency assets without fully declaring the resulting gains. These letters, which are based on data obtained from major crypto exchanges, warn that failure to disclose could lead to additional tax liabilities, including Capital Gains Tax (CGT) or Income Tax, as well as interest on late payments and significant penalties. A larger wave of these letters is expected to follow in September, as HMRC seeks to intensify its focus on this area.
Common Reasons for Underreporting Crypto Gains
One of the main reasons why many cryptocurrency gains go unreported is the complexity surrounding the tax treatment of digital assets. HMRC generally considers the profit or loss from buying and selling cryptocurrencies as subject to Capital Gains Tax. However, many investors are unaware that certain actions are considered taxable events. For example:
- using cryptocurrency to purchase goods or services
- exchanging one type of cryptoasset for another; or
- gifting cryptoassets.
In certain circumstances, income tax and NI may be payable.
These letters, which are based on data obtained from major crypto exchanges, warn that failure to disclose could lead to additional tax liabilities
Additionally, the constantly evolving nature of the cryptocurrency market, combined with the relative novelty of these assets, has left some investors unsure of their tax obligations. Misconceptions, such as the belief that holding assets in crypto without converting them to fiat currency exempts them from tax, further contribute to non-compliance.
Options for Voluntary Disclosure to HMRC
If you receive such a letter from HMRC, you must take action within 60 days even if no tax is due. If you submitted a tax return, the return should be amended where possible. If you did not submit a tax return, or the deadline has passed, you should use the dedicated Cryptoasset Disclosure Facility (CDF)to inform HMRC.
While the CDF was specifically designed for cryptocurrency owners, there are other disclosure routes which might be more appropriate depending on individual circumstances:
1. Contractual Disclosure Facility (CDF) – This facility offers protection from prosecution for those making full disclosures of deliberate tax fraud, making it a critical option for those concerned about potential criminal liability.
2. Worldwide Disclosure Facility (WDF) – Suited for individuals with offshore holdings, the WDF allows for the disclosure of unpaid taxes on global assets.
3. Digital Disclosure Service (DDS) – Best for UK-based holdings or when multiple tax issues, such as inheritance or corporation tax, are involved.
If you receive such a letter from HMRC, you must take action within 60 days even if no tax is due.
These disclosure options allow taxpayers to notify HMRC of their intent to disclose and provide a 60-90 day window to make full disclosures and settle any outstanding liabilities. This flexibility is especially useful for addressing multiple tax issues at once, which is often the case with complex financial situations.
Take Prompt Action – Choose The Correct Disclosure Option
Receiving a nudge letter from HMRC should not be taken lightly. Whether you believe your tax filings are complete or suspect there may be discrepancies, it is crucial to act quickly. Consulting a tax adviser can help you choose the correct disclosure option and potentially reduce penalties.
Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.
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