In recent years, HM Revenue and Customs (HMRC) has intensified its efforts to ensure that taxpayers report their crypto asset capital gains accurately. If you have engaged in cryptocurrency transactions and have not informed HMRC, you might soon find an HMRC letter in your mailbox. This article serves as a vital educational alert from a tax advisor to individuals engaged in cryptocurrency trading, shedding light on HMRC’s pursuit of tax compliance in the crypto sphere.
Annual Projects and Rising Scrutiny
Each year, HMRC commissions projects aimed at identifying inaccurate or omitted capital gains tax declarations related to crypto assets. The tax authority has increasingly amplified its scrutiny of cryptocurrency transactions, and it is using advanced data analytics tools to do so. HMRC sources data from third parties such as cryptocurrency exchanges to identify individuals who have either submitted inaccurate tax returns or have not informed HMRC about their capital gains.
Unprompted Disclosure Letters
HMRC’s primary approach begins with educational letters. Initially, HMRC will reach out to individuals who may have capital gains from cryptocurrency transactions. The goal is to encourage taxpayers to voluntarily disclose any historic tax liabilities related to these gains. This phase operates as an unprompted disclosure, where HMRC aims to educate taxpayers about their obligations.
Prompted Disclosure Letters
For those who do not respond to the initial educational letter, HMRC will escalate its efforts. The tax authority will start issuing prompted disclosure letters. These letters are intended to motivate non-compliant taxpayers to report their crypto asset capital gains accurately. If you receive such a letter, it is a sign that HMRC has identified discrepancies in your financial records.
HMRC’s strategy is not just about enforcement; it is also about educating taxpayers on their obligations regarding crypto assets and capital gains tax. It is imperative for individuals to understand that they need to report capital gains if they
- Sell Their Cryptocurrency Assets: Whether you have sold your digital assets for fiat currency or another cryptocurrency, these transactions are subject to capital gains tax.
- Exchange Their Cryptocurrency Assets: Swapping one type of digital asset for another is also considered a taxable event. Even if you have not converted to traditional currency, you may still owe tax.
- Use Their Cryptocurrency Assets for Purchases: When you use cryptocurrency to buy goods or services, it is essential to recognise the capital gains implications.
- Give Away Cryptocurrency: Gifting cryptocurrency to someone other than your spouse or civil partner can trigger tax obligations. HMRC is particularly watchful of this practice.
HMRC’s Notification Process
To initiate the process, HMRC will begin by sending out educational letters to individuals who may have unreported crypto capital gains. These letters will enquire whether you have made gains from selling or trading cryptocurrency assets. HMRC will encourage recipients to notify the tax authority of any historic tax liability through the digital disclosure process or by filing a tax return using the standard self-assessment method.
How We Can Assist
HMRC’s intensified focus on cryptocurrency transactions and capital gains disclosure highlights the importance of understanding your tax obligations in the crypto space. With their annual projects and data analytics tools, HMRC is determined to bring tax compliance to the forefront of the crypto community’s awareness.
If you discover that you have indeed made capital gains from cryptocurrency transactions and have not yet notified HMRC, we can help you navigate this process. Our team of experienced tax advisors can assist you in accurately declaring your gains and ensuring you pay the tax you owe. Remember, compliance with HMRC’s guidelines is crucial to avoid potential penalties.
This article is only generic advice and not tax-specific. If you require further information or assistance regarding receiving an HMRC letter, please contact us and our team of Crypto Accountants will be happy to help.