UK’s HMRC Targets Crypto Tax Evasion with ‘Nudge Letters’

The UK’s HM Revenue & Customs (HMRC) is intensifying efforts to ensure that cryptocurrency investors properly disclose and pay taxes on their gains. The agency has initiated the process by sending out ‘nudge letters’ to investors who might have neglected to report or pay taxes on profits from crypto transactions. This initial wave of letters is just the beginning, with more expected to be dispatched next month.

Taxable Crypto Income

HMRC has clarified that income derived from lending, staking, and mining cryptocurrencies is taxable. Additionally, earnings from crypto-related employment are subject to taxation. Investors who fail to declare past crypto gains could face penalties, including interest on late tax payments.

Crypto Gains and Capital Gains Tax (CGT)

Tax consultancy BDO explains that HMRC typically considers profits or losses from buying and selling cryptocurrencies subject to Capital Gains Tax (CGT). It is rare for HMRC to recognize crypto trading as a trade for tax purposes, meaning CGT is generally applicable. Individuals who have profited from selling cryptocurrency during the year may owe taxes and should be prepared to report their crypto transactions and potentially file a return.

“Many owners of crypto assets may not be fully aware of their obligations and may not have filed a tax return before,” said BDO tax partner Paul Falvey. “They could well get a shock when this letter hits the doormat – but the worst thing they could do is to ignore it.”

Enforcing Compliance and New Advertising Standards

Last year, HMRC launched a crypto tax disclosure campaign, marking the first time the tax authority provided a dedicated process for individuals to disclose and rectify unpaid taxes on assets like exchange tokens, NFTs, and utility tokens.

The UK is known for its stringent regulations on crypto companies, particularly regarding advertising and registration. This week, the Financial Conduct Authority (FCA) released new promotional guidelines for crypto firms after assessing their compliance with financial promotion regulations. The FCA’s new guide highlights effective and inadequate practices observed in various firms to help the industry meet compliance standards.