HMRC’s Crypto tax nudge letters

A few years ago crypto was almost a mythical phenomenon, with investors few and far between, and those who invested may have been looked upon as slightly mad to trust such a new form of investment. Fast forward to 2024 and it’s everywhere, with investors making such attractive profits, it’s hard not to consider what investing in crypto could do for you.

So if you have taken the plunge and invested, are you aware of the tax you owe? HMRC have been quick to jump on the fact there’s tax money to be made on such investments, and that this needs to be tracked and managed correctly. In this blog we explore the world of crypto HMRC ‘nudge’ letters, and what you should do if you get one.

First things first – what are ‘nudge letters’?

If HMRC believe you have made undisclosed profits on cryptocurrency and owe them tax, you may be sent a ‘nudge’ letter from them. To date 8,329 of these letters have been sent out from HMRC, and they’ve been very busy collecting data from crypto exchanges for the past three years in order to obtain this intel.

If you own crypto you may not even be aware that you owe Capital Gains Tax if you’ve sold any of your digital assets, or if HMRC consider you to be a ‘crypto trader’ then you’ll be subject to paying even more tax in the form of income tax on your holdings. If you mine cryptocurrency, generate interest from ‘staking’ your crypto, receive any airdropped crypto, or trade large amount on a regular basis, you could also be subject to paying tax.

As of 2022 it’s predicted that a massive 4.97 million people in the UK own some form of cryptocurrency, so it’s no surprise HMRC have turned their attention to those who hold it.

What do the letters say?

The letter will indicate that either you currently hold, or have held investments in cryptoassets, and the following three instances may imply that a taxable gain has occurred:

1. If you are / have traded cryptocurrency in the past – for example, if you sold your crypto assets for a greater value than you originally paid for it
2. If you swap one form of cryptocurrency for another form
3. If you purchase something using your cryptocurrency

The above three points are examples of crypto disposals. Point 1 is classed as a traditional disposal, where points 2 and 3 are examples which HMRC was to raise awareness about. In these points it’s considered that cryptocurrency has been sold at the point where a transaction has taken place, and therefore either more crypto or something purchased has been received by the owner. In both cases the usual Capital Gains Tax rules would apply.

How much tax is due?

If you receive an HMRC nudge letter, it won’t automatically mean you owe tax but it is worth thinking about whether you need to report any losses or gains. The annual exemption amount for Capital Gains is currently £6,000 for the 2023/34 tax year, but this will reduce to £3,000 in the 2024/25 tax year. If your net gain exceeds this amount in any given tax year, you must report it to HMRC via your self-assessment tax return. Be aware that if your proceeds exceed £50,000, but your gains are below the annual exempt amount, you must still report your gain to HMRC.

At SG our cryptocurrency experts will be able to look at the big picture, and advise you on what action you need to take in order to stay on the right side of the taxman. For more information on whether you owe tax on your cryptocurrency, take a look at our blog or get in touch with our team.

What happens next?

As part of HMRC’s tax authority campaign against unpaid crypto tax, it’s considered that the nudge letters will be followed by enquiry letters. Enquiry letters request greater in depth information from yourself and your cryptocurrency holdings, and with HMRC gaining greater access to data, it’ll become much harder to evade their attention.

Going into the future investors absolutely must be aware of how much tax they owe on their crypto, or expect the usual treatment from HMRC when tax is evaded.

How can SG Accounting help?

SG is one of the very few accountants out there that’s able to offer crypto advice and support, especially when it comes to how crypto fits in with Limited Company and Sole Trader dealings. Most other accountancy’s see crypto as a ‘flash in the pan’ trend and are expecting it to dissipate imminently, but here at SG we are seeing the real profits people are making, are listening to HMRC’s warnings and future plans, and acting accordingly on our client’s behalf’s.

If this sounds like the type of proactive advice and support you need for your cryptocurrency invests, get in touch. Our team will be able to advise you on the tax due, and help you moving forward.