HMRC Is Acting on Cryptocurrency Activity With ‘Nudge Letters’

Crypto Currency

With the rise and volatility of cryptocurrencies, HMRC has been taking an interest in handling this digital phenomenon. HMRC is set to send out thousands of ‘nudge letters’ (a gentle reminder you might need to make a declaration) to cryptocurrency investors which should not be ignored. The activity is not illegal, however key to compliance is understanding your tax obligations so that you can make informed decisions.

The global cryptocurrency stage

The global cryptocurrency stage is a mixed bag. El Salvador embraced Bitcoin as a fiat currency (legal tender), Nigeria became the first African country to adopt a central bank digital currency ‘eNaria’, while China banned mining cryptocurrency and declared all cryptocurrency transactions illegal, testament to how separate countries are reacting very differently to this new digital currency.

The UK cryptocurrency stage

The UK picture sees cryptocurrencies regulated. A middle of the road on approach, regulating activities of exchange providers, issuing of new cryptocurrencies and custodian wallet providers in the UK. There is no specific legislation on cryptocurrencies or ‘Non-Fungible Tokens (NFTs)’ in the UK, other than regulating these activities.

These decentralised digital currencies are unregulated for the most part and are extremely volatile. Taking cryptocurrency as payment can be risky as the price can go up or down in value and this can happen on a dime. There is also room for those that do understand the currency to take advantage of those that don’t. And of course, there’s the chance of losing a lot of money. 

What HMRC is doing to increase regulation

HMRC has written to various UK based cryptocurrency exchanges to ask them to provide information about clients who have been buying and selling cryptocurrencies.

It is anticipated HMRC will produce ‘nudge’ letters saying ‘we are aware you have made certain transactions – have you reported these correctly?’ Most recently these letters referred to overseas income and gains.

While many people buying and selling cryptocurrency and NFTs may be unaware that any profits and gains should be taxed in some way, once they have received such a letter, they can no longer plead ignorance. If they ignore the letter, HMRC is likely to consider charging higher penalties when they make an assessment.

As the information HMRC is using has also come from only UK based exchanges, other income, gains and losses may not be taken into account by HMRC, so they may also seek to charge incorrect amounts of tax.

It should be emphasised – as with investing in any assets, there is nothing wrong with investing in crypto assets. The key is understanding your tax obligations so that you can make informed decisions.

Steps to take

We urge businesses and individuals receiving a nudge letter to seek an adviser with experience in advising on crypto assets.

In particular if you sold crypto assets in 2020/21 you will need to check whether it resulted in a taxable gain or loss which ought to be reported on your self-assessment return for that year. Or if you have already submitted you can submit an amendment. The same applies for 2019/20 transactions. If you made a taxable gain or profit from selling cryptocurrencies for 2020/21 and are not yet registered for self-assessment and have not reported it to HMRC you could be liable to a penalty.

Even if a letter has not yet been received, if you are concerned about tax on any crypto activities you have undertaken, you should contact someone immediately. These letters may go back for up to 6 years, and that can amount to a lot of penalties and interest if you have been a successful investor or trader. By addressing your position early, you can put yourself in a stronger position and ensure that your income and gains are reported correctly.

Let’s Talk

If you’d like to go discuss your tax position in relation to crypto and other digital assets let’s talk.

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