HMRC has launched a new campaign to ensure that UK taxpayers are accurately declaring and paying taxes on their cryptoasset gains. As part of this campaign, letters are being sent to targeted individuals who are suspected of not declaring taxable gains or income from their cryptoassets.
Some taxpayers mistakenly believe that gains from cryptoassets are tax exempt, but this is not the case. If you invest in cryptoassets and make gains, it’s crucial to understand the tax rules surrounding those gains and to respond appropriately if you receive an HMRC letter. This article explains the tax position and what action is needed.
What are the tax rules for cryptoassets?
Any gains made from the sale of cryptoassets, like Bitcoin, Ethereum, and other digital currencies, are usually subject to capital gains tax (CGT).
Note that if you exchange cryptoassets rather than sell them, this is still considered by HMRC to be a taxable disposal; relevant activities for tax purposes include cryptoasset mining, staking, or ‘airdrops’. When calculating the gain arising, the value of the cryptoassets received must be converted to their equivalent sterling value at the time of receipt and it must be declared a tax return.
The key points of HMRC’s tax rules concerning cryptoassets are:
Requirement to pay Capital Gains Tax (CGT)
If you sell or dispose of cryptoassets for more than you paid for them, this profit is considered to be a capital gain. If the gain exceeds the current annual tax-free CGT allowance – £6,000 for the tax year 2023-24 – then tax is payable. This is charged at either 10% or 20%, depending on your marginal rate of income tax.
For tax purposes, a disposal includes selling a cryptoasset for cash, trading one crypto asset for another, using crypto currencies to purchase goods or services, or giving a cryptoasset as a gift. Note that gifts between spouses or civil partners are not taxable.
Requirement to declare trading for income tax purposes
If you receive cryptoassets as a payment for goods or services, or you trade regularly in cryptoassets, you may be considered to be carrying on a trade, rather than incurring capital gains. Profits from such activities are chargeable to income tax rather than capital gains tax
Need for diligent record-keeping
Detailed records of crypto transactions are required by HMRC to verify relevant investment values. Records kept should include all transaction dates, the equivalent values in pounds and the type of transaction. These records are essential for calculating CGT or income tax liabilities. It will be important to carefully review your crypto transactions to determine if you have any unpaid tax liabilities. If you have received a letter from HMRC but believe your tax filings are correct, you will need to provide them with information supporting your position. This may require the support of a tax specialist to advise you.
HMRC’s new crackdown on cryptoassets
HMRC has started sending “One too Many” letters directly to taxpayers who they believe may not have properly declared their cryptoasset activities. These letters should not be ignored, HMRC requires a response within 60 days of receipt. Failure to act appropriately could trigger an investigation or penalties.
It is important to understand that if you have received one of these letters, it means HMRC has received information suggesting that you have engaged in crypto investing or trading and may owe taxes. This information could have come from a bank, trading platform or another financial service provider.
If you find you have undeclared taxable gains or income from cryptoassets, it is possible to use HMRC’s cryptoassets disclosure service to voluntarily correct your filings. This will help to mitigate the potential penalties. Bear in mind that it is always advisable to seek professional tax advice before engaging with HMRC to understand the implications and how to approach making a disclosure.
For advice on tax compliance and making a voluntary disclosure for tax underpayment, email partners@rjp.co.uk.