HMRC’s Crypto tax nudge letters

Crypto’s popularity has grown beyond anyone’s expectations in the past few years, and with more and more people investing or considering it, it’s worth understanding the accompanying tax implications, and what you could owe.

In this blog we take a closer look HMRC’s crypto tax nudge letter, what you’ll need to do if you receive one, and how you need to manage your crypto tax moving forward.

HMRC’s nudge letters – a closer look

Should HMRC have reason to believe you’ve made undisclosed profits on your cryptocurrency and that you therefore owe them tax, you may have or possibly will receive one of their ‘nudge’ letters. To date they’ve sent out 8,329 letters to people who’s data they’ve received from crypto exchanges, over a period of three years.

As a crypto owner you may not even be aware that you owe Capital Gains Tax (CGT) if you’ve sold any of your digital assets, or should HMRC believe you’re a ‘crypto trader’ then the amount of tax you’ll need to pay will be significantly higher again 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 amounts on a regular basis, you may be subject to paying more tax.

In 2022 it was predicted that 4.97 million people in the UK owned some form of crypto currency, so it’s easy to see why HMRC have turned their attention to crypto owners.

What do the letters say?

It’ll indicate whether you currently hold, or have held investments in cryptoassets, and the following three circumstances may imply that a taxable gain has occurred:

1. If you currently are / or have traded cryptocurrency in the past – ie if you sold any crypto assets for a greater value than you paid for them
2. If you swap one type of cryptocurrency for another
3. If you purchase something using cryptocurrency

The above points are examples of crypto disposal. Point 1 is classed as a traditional disposal, and points 2 and 3 are examples which HMRC want to make examples of. In these two points HMRC consider cryptocurrency has been sold at the exact point when a transaction has been made, and therefore either more crypto has been gained, or something has been purchased by the owner. In both cases the rules surrounding Capital Gains Tax would apply.

How much tax would you need to pay?

Receiving an HMRC nudge letter wont automatically mean you owe tax, but it is worth considering whether you need to report your crypto gains and losses. The Capital Gains annual exemption is currently £6,000, reducing to £3,000 in the 2024/25 tax year. If your net gain exceeds this amount in any given tax year, then you’ll need to report it to HMRC through your self-assessment tax return. If your proceeds exceeds £50,000, and your gains remain below the annual exemption amount, you’ll still be required to report your gain to HMRC.

Here at Aardvark our tax experts are able to look at your finances and investments as a whole, and guide you on the best course of action to take in order to keep the taxman happy. To understand more about whether you owe tax on your cryptocurrency take a look at our blog, or get in touch with the Aardvark team.

What’s the next step?

As part of HMRC’s crusade against crypto owners, the nudge letters will be followed by enquiry letters. These letters will request more in depth information about yourself and your cryptocurrency holdings, and with HMRC’s ability to get hold of more and more data regarding crypto it’ll become harder and harder to both ignore and hide from.

Looking to the future crypto investors must be aware of their tax responsibilities or expect the same treatment from HMRC regarding any other form of tax evasion.

How can the Aardvark Team help?

Here at Aardvark we have a team of tax experts, who are able to offer crypto advice and support. From looking at your current assets and understanding if there are any tax implications, to looking ahead to the future and helping you get ready for your next self-assessment, our team can make you crypto compliant.

For more information on crypto and how Aardvark can help you, get in touch today.