Case of the Month – Cryptocurrency – HMRC Disclosure
Scenario
Mr A, a UK resident higher-rate taxpayer, had actively traded cryptocurrencies over a period of approximately four years (2021/22 to 2024/25) using multiple online platforms, including Binance, Coinbase, and Kraken. His activity included frequent spot trades, occasional use of stablecoins, and participation in token swaps. Over the period, his total crypto disposals amounted to approximately £450,000.
The Issue
Mr A was unaware that most cryptocurrency disposals are subject to UK Capital Gains Tax (CGT) and that detailed transaction records are required to calculate gains under HMRC’s share pooling and matching rules. He had never reported any crypto gains on his Self Assessment tax returns.
As a result:
No CGT had been declared for four tax years
Transaction records were incomplete and not in a format suitable for tax reporting
Some exchange accounts had been closed, making data recovery more complex
Mr A became increasingly concerned after reading about HMRC’s heightened focus on cryptocurrency compliance and their data-sharing arrangements with major exchanges. He approached ETC Tax proactively to regularise his position before HMRC made contact.
How We Helped
ETC Tax undertook a comprehensive review and reconstruction of Mr A’s cryptocurrency transaction history, including:
Obtaining CSV data from multiple exchanges and wallets
Reconstructing missing trades using blockchain explorers where necessary
Converting all transactions into sterling values using HMRC-accepted exchange rates
Applying UK share pooling and matching rules to calculate chargeable gains for each tax year
Identifying allowable costs, including exchange fees and transaction costs
Following this review, we calculated total undeclared capital gains of approximately £185,000 over the four-year period. This enabled us to prepare revised CGT computations for each tax year and submit a comprehensive voluntary disclosure to HMRC. Our submission included a clear explanation of how the errors had arisen, and we successfully negotiated with HMRC to apply reduced penalties in light of Mr A’s prompt and unprompted disclosure and full cooperation.
Outcome
HMRC accepted the disclosure and agreed a lower-rate penalty. Mr A paid the outstanding tax, interest, and penalties in full, avoiding a formal enquiry or investigation. He is now fully compliant and:
Receives ongoing advice on the UK tax treatment of cryptocurrency transactions
Uses appropriate software to maintain accurate records of all crypto activity
Has an agreed annual review process with ETC Tax to ensure compliance is maintained
Client Benefit
By acting proactively and engaging ETC Tax, Mr A was able to regularise his tax position with minimal disruption, avoid potentially higher penalties, and gain certainty over his crypto tax affairs going forward.
Next Steps
If you have a similar case to the one above or would like to discuss your crypto situation further please get in touch enquiries@etctax.co.uk
Preparing for the Unpredictable with Crypto and Inheritance Tax
They say only two things in life are certain: death and taxes. But when it comes to cryptoassets, certainty is in short supply, particularly over the long term. The value of your digital holdings in 30 years could triple, or be close to nothing (who knows!).
One more certain thing: if you’re a UK-domiciled individual, your cryptoassets could be subject to Inheritance Tax (IHT) on your death.
So, if you could take steps today to protect that value (whatever it may be in future) wouldn’t you want to?
The Basics
Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, the standard rate is 40%, applied to the value of the estate above the nil-rate band, which is currently £325,000.
Cryptoassets, for legal and tax purposes, are treated as personal property. This means they form part of your estate and are therefore assessable for IHT purposes. They can also be held within a trust.
Practical Challenges
Valuation
Given the high volatility of cryptoassets, it is crucial to obtain an accurate valuation of crypto holdings as at the date of death. This is easier said than done and may require retrospective valuation evidence or professional assistance to ensure accuracy.
Access
While IHT applies based on the value of the estate, access to that crypto presents a unique problem.
Unlike traditional financial assets (e.g., bank accounts, investments, or property), cryptocurrencies are stored in digital wallets, which can only be accessed using private keys, passwords, seed phrases, or login credentials.
Without these details, your Executors will be unable to access the assets. This makes proper planning and secure transmission of this information essential when incorporating any gift of cryptoassets in your will.
Lost Crypto
We have seen first-hand a situation where a client’s relative passed away holding a substantial crypto portfolio. Unfortunately, with no private key or access details left behind, the crypto could not be accessed and was ‘lost’ forever.
In that case, despite the assets being inaccessible, without applying reliefs they were still technically liable for IHT on their value at the date of death. So, does this mean you have a hefty IHT bill without the funds to pay it? That doesn’t seem fair to us.
There is a provision which considers changes in the value of the estate’s assets caused by death (e.g., if access is lost due to death) that can be taken into account. Therefore, if crypto becomes irrecoverable because of death, there may be an argument that the fall in value should be treated as if it occurred before death, reducing the tax burden. However, this is a nuanced and evolving area, HMRC guidance does not give a view on this and it is yet to be tested in the courts.
Planning Ahead
With the above challenges in mind, it’s important to plan ahead. Despite the complications, the core principles of estate planning still apply.
However, a balance needs to be struck between planning to reduce IHT, providing clear access instructions in the event of your death, and maintaining the security of those assets during your lifetime (and post-death).
Examples of IHT Planning
Gifting: Gifting cryptocurrency during your lifetime can reduce your estate’s value, and if you survive seven years, the gift may be fully exempt from IHT.
Spousal Transfers: Transferring crypto to a spouse or civil partner is IHT-exempt and helps defer tax until the surviving partner’s death.
Life Insurance Policies: A life insurance policy written in trust can be used to cover the IHT liability arising from crypto holdings.
Use of Trusts: Placing cryptoassets into discretionary trusts can be a useful tool for passing on the assets securely and removing them from your estate for IHT purposes.
Use of Family Investment Companies (FICs): Holding crypto in an FIC may allow control while transferring value to the next generation in a tax efficient way.
Other Practical Steps
Keeping a clear inventory – What assets do you own? On which platforms or wallets are they held? Are they staked or part of a liquidity pool?
Secure but separate storage of sensitive data – Avoid listing private keys in your will. Instead, reference a securely stored, encrypted inventory, and review this data regularly.
Security planning – Use multi-signature wallets, trusted family members as co-signers, or “Dead man’s switch” mechanisms.
Use a solicitor – Ensure your will makes express reference to your cryptoassets and clearly sets out how they are to be passed on, and to whom.
A Word on Mindset
Cryptoassets should be treated like any other estate asset. But due to the nature of the technology, and the mindset of many crypto enthusiasts, planning can be more complicated than for traditional holdings.
Many holders pride themselves on autonomy and privacy. But without practical estate planning, that same autonomy could result in family members being left with no access to the cryptoassets.
Conclusion
Crypto is volatile, complex, and often misunderstood. But that doesn’t mean it can be ignored for inheritance planning purposes. On the contrary, it makes planning all the more important, not only to preserve value but also to ensure those precious assets land safely in the hands of your loved ones.
If you or your clients hold cryptoassets, there is no time like the present to take stock, plan sensibly, and put the necessary safeguards in place. The earlier you plan, the better. That way, the value – whatever it may be in future – has the best chance of making it into the hands of those you care about, and not just HMRC.
Next Steps
If you would like tailored advice on cryptoassets and inheritance tax planning, please get in touch with the team at ETC Tax and we’d be happy to help.
Head over to our crypto section on our website to see how we can support you when dealing with our crypto.
For those of you that still think crypto is outside HMRC’s reach, think again!
Whether you’re a casual trader, a long-term holder of crypto, or someone dabbling in NFTs, HMRC will increasingly be able to track you down.
Most people now realise that cryptoassets are taxable, but it’s not just when you sell tokens for cash. Swapping one cryptocurrency for another, say, trading Bitcoin for Ethereum, counts as a disposal, and if there’s a profit, it’s likely to be taxable.
Using crypto to buy a pizza, a new laptop, or even giving it away in some circumstances? That, too, could be a taxable event.
Tax returns are getting a crypto update
In fact soon there’ll be a specific section just for crypto activity on your self-assessment tax return.
You’ll need to disclose the type of tokens you hold, when you bought or received them, how many you’ve got, and their value in pounds at the time of the transaction.
That means no more guesswork. You’ll need proper records.
HMRC advises keeping digital wallet addresses, dates of transactions, and bank statements. And if HMRC decides to investigate? Well in certain circumstances, they can look back as far as 20 years.
Right now, crypto exchanges don’t automatically report your activity to HMRC. But that’s also changing.
From 2026, new global transparency rules are expected to come into play. These rules could force platforms to start handing over customer data to the tax authorities, including HMRC, similar to the way online marketplaces like eBay and Etsy now report their seller’s income.
So, if you’ve been quietly trading or earning in crypto, the window for staying under the radar is closing fast.
Mining, earning, and spending crypto? It All Counts
What about crypto mining? Well, that counts as income too and should be reported as such on your tax return.
And if you’re getting paid in cryptocurrency, you still need to account for income tax and National Insurance. In most cases, this should be taken care of through PAYE, but if it isn’t, the responsibility lies with you.
What’s more, even where income tax is accounted for, if you later sell that crypto at a profit, you could also be hit with a Capital Gains Tax bill.
HMRC is already taking action
Last year, HMRC sent letters to individuals they suspected of failing to report crypto-related income and gains with a 60-day deadline to reply.
If you’ve missed declaring income in previous tax years, there is a way to sort this out through HMRC’s disclosure facility. But be prepared, this could result in penalties and interest on unpaid tax, so if you do get a letter, it’s always best to get professional advice before you reply
The crypto world moves fast, but HMRC is catching up. Whether you’re a miner, trader, investor, or someone paid in crypto, you need to be compliant.
Next Steps
At ETC Tax, we make crypto tax compliance clear, simple, and stress-free. We understand how the rules apply, how to get your records in order, and how to protect yourself from unnecessary penalties.
If you think you might have something to declare or just want peace of mind, get in touch with us today.
The talk of crypto town at the moment is very much the Ethereum Merge or simply The Merge which happened today.
I’m not talking about some kind of BBC drama by numbers whose formula consists of picking a verb at random and prefixing it with the definitive article.
No, we are talking about the shift by the Ethereum blockchain from the Proof of Work engine to Proof of Stake.
Sadly, I will only attempt to answer the first three… and (more sadly) throw in some obligatory tax content (otherwise Mrs Wood won’t let me write any more articles).
Crypto is full of jargon, which is saying something from someone who works in tax. I have tried to explain this away as much as possible. However, we have a very useful ‘cryptionary’ that might assist where I fall short.
Consensus Mechanisms
General
The challenge of any system of digital money lacking third-party oversight is how to prevent more nefarious characters from abusing it.
How can the network, made up of many nodes, reach agreement (or consensus) regarding the data it receives? What information is correct and what is incorrect?
Proof of work
The Bitcoin protocol introduced a mathematical solution to this problem. This is the “proof of work” (“POW”) consensus mechanism. The idea is that it makes the economic cost of attacking the system disproportionate to the potential benefit of such a move.
Let us say that I want to purchase some cryptocurrency and I execute this through my wallet using a decentralised exchange. Here, each node will attempt to validate this transaction by competing with other nodes to solve a complex mathematical puzzle.
Where a node is successful in being the first to find the ‘hash value’ of the transaction, you can add to the ledger. It will transmit this data to all of the other nodes in the network who will also verify its validity.
The process of mining rewards a successful node with a “block reward” which is usually in the form of newly mined tokens.
Determining the correct hash requires computer processing time which in turn requires energy (and sometimes a lot of it!). This is a double-edged sword for POW consensus mechanisms. For instance, as a positive, a bad actor might invest a huge amount of resources in making sure that he or she is first to find the hash. However, it would be highly unlikely that the rest of the network would accept the nefarious player’s block of transactions. As such, our bad actor has expended a lot of energy and cost for no result. On the other hand, the energy costs of POW blockchains such as Bitcoin led to criticism for having an adverse environmental impact.
The Ethereum network, up until the merger, also used POW (albeit being a variation on the one used by Bitcoin). However, the Merge represents a shift to something called Proof of Stake (“POS”).
Proof of Stake (“POS”)
This is a mechanism some other blockchains use (e.g. Tezos and Cardano). Here, only members of the network with a financial stake may add blocks to the distributed ledger. Rather than battling with other members of the network to solve a problem, so-called validators in a POS network do not compete with each other. Instead, they must prove that they own an amount of the network’s tokens in order to be able to generate a block on the ledger.
The rationale is that the greater a person’s financial investment in a network, the lower the likelihood that the person will be a bad actor. As such, influence is proportional to the number and value of tokens a person holds in the relevant network.
Capice?
What is the Ethereum Merge?
Essentially, the Merge is the shift from POW to POS without closing down the Ethereum network.
You know I like an analogy. The more tortured the better. So here goes…
It is therefore the equivalent of changing a car from an combustion engine to an electric whilst driving down the M6 toll.
But why is it called The Merge?
Well, this is because, from a technical perspective, it is doing exactly what it says on the tin. In other words, the event is the merging of two separate blockchains.
Two separate blockchains?
You do ask a lot of questions.
Of course, one of these is the current blockchain which is officially called the Ethereum Mainnet. Alongside this, for some time, there has been a ‘shadow’ POS version of the blockchain called Beacon Chain.
Now the Merger has taken place, the POS blockchain has taken over.
So, a bit more than not leaving your TV on standby!
However, the resulting coin, referred to as Ethereum 2.0, is not a new token.
What are the tax implications of the Ethereum Merge?
Where there is simply a merger of the two blockchains and one essentially owns ETH tokens under a POS system rather than a POW consensus mechanism. As such, I cannot see how there is any disposal for tax purposes. In other words, we are not exchanging one distinct cryptocurrency for another which, as you may be aware, would usually be a disposal for tax purposes.
I think this view is supported by HMRC’s manuals.
The shift from mining coins to staking / forging is unlikely to change the taxpayer’s income taxes position either. Generally speaking, for average investors, this will be treated as Miscellaneous Income. Those who mine or stake on a more deliberate and organised basis will likely be within the trading income rules.
But is there a potential, ahem, canary down the crypto mine?
For fork’s sake
Although we do not know for certain, the Merge might result in a fork of the Ethereum blockchain.
A fork might occur where there is some disagreement in the coin’s community as to how a particular coin might develop. As such, the blockchain splits and the two different communities go their own way.
Blockchain forks have happened before with, most famously, with Bitcoin Cash being a fork of Bitcoin. Ethereum itself has previously undergone a hard fork in the past which resulted in the creation of Ethereum Classic or ETC (no relation!)
The rumour is many Ethereum miners are somewhat anxious about these developments (I can’t think why – other than they have warehouses full of much less profitable mining rigs.) As a result it is expected that there will be a ‘hard fork’ in the blockchain with the disgruntled miners keeping on their digital mining helmets and continuing to mine the token on their own version of the blockchain. This will be done by ETHW Core under the highly creative moniker ETHPOW with its token called ETHW.
Where new tokens are issued as a result of the fork then it is likely that TCGA 1992, s. 43 (“Assets derived from assets”) will apply in relation to the new tokens. As such, the costs for capital gains purposes will need to be split between the old and new tokens on a just and reasonable basis.
Conclusion
Undoubtedly, the move for Ethereum from POW to POS will be significant. As stated above, it massively reduces the energy input required to keep the blockchain living and breathing.
Of course, bitcoin is the biggest and most well-known of the cryptocurrencies. However, without angering the bitcoin maximalists, the Ethereum is much more useful. Indeed, as per the figures produced by Outlier Ventures for Q4 2021, it is the blockchain with the most active developers. In reality, Ethereum and Cardano are in a league of their own, with the others merely also rans.
Further, Ethereum is the father and / or mother of NFTS and, anecdotally, they say many potential investors were reluctant to explore this world of Bored Apes and Cool Cats because of the environmental concerns. The Merge may assuage this objection.
If you have any queries about the Ethereum Merge, tax on cryptoassets, or tax in general then please do get in touch.
We look at the Disclosure and Reporting of Cryptoassets
Cryptocurrency investors are often unaware of their tax position and are likely to have accrued tax liabilities over several years which have gone unreported. HMRC have an arsenal of tools available to them and are actively seeking to obtain information from exchanges, wallet and other crypto-platforms to identify taxpayers who have failed to report and pay their liabilities.
As cryptocurrency continues to grow in popularity, HMRC will be less likely to accept that taxpayers are simply unaware of their obligations and have acted carelessly in failing to report their liabilities, or in some circumstances, deliberately failing to report their liabilities.
In this article, ETC Tax looks at the disclosure and reporting of cryptoassets.
What do we know about HMRCs Approach?
HMRC are actively seeking to obtain information from exchanges to identify taxpayers who may have failed to report any tax liabilities. HMRC have published manuals with a section dedicated to compliance, containing headings including:
Risk
Indicators of Cryptoasset Usage
Cryptoassets in Investigation
Questions to Ask
Information Powers
Regulation and Anti-Money Laundering
Mixers and Tumblers
Case Referrals
All but two of these headings have been withheld under Freedom of Information provisions but it is clear that HMRC considers Cryptoassets to be an area which involves high-risk of non-compliance and criminal activity.
HMRC have a number of statutory tools available to them to request information from exchanges and wallet providers, in the UK and overseas. Whilst the scope of these provisions may be subject to challenge, this is a developing area and is not something we detail in this article.
Additionally, crypto exchange and wallet providers are being brought within the Anti-Money Laundering regulations, enforcing due diligence requirements, requiring customers to disclose their identities and reporting suspicious activity, meaning that relevant information will be more accessible subject to a valid information request by HMRC.
In summary, it would not be unreasonable to assume that HMRC will have access to your crypto-data eventually. We would strongly advise individuals to review their position and making a voluntary disclosure to HMRC where there is an unreported liability.
Do I have a liability or reporting obligation?
Ultimately, individuals who are involved in cryptoassets should review their positions immediately. Typically, persons involved in the following activity are likely to have a reporting requirement and / or tax liability:
Crypto-trading (whether for FIAT or crypto-for-crypto exchanges) and margin trading
Participating in mining, staking and liquidity pooling
Trading in CFDs, options and futures
Creating and / or trading in Non-Fungible Tokens (“NFTs”), whether for FIAT, crypto or other payments
Peer-to-peer lending
Providing services in return for cryptoassets
Participating in airdrops
For investors who have simply purchased crypto using FIAT currency, and have not undertaken any transactions, the likelihood is that there would be no event for tax purposes. However, we would still recommend taking advice where you are planning to sell or exit your holdings, as this would be taxable and there may be planning opportunities to reduce the tax liability.
However, if you fall within any description set out above, we would strongly recommend that you review your historic and current position.
How do I make a disclosure?
HMRC have an online disclosure facility designed to enable taxpayers to make voluntary disclosures. However, the disclosure process can be long and arduous. Firstly, a taxpayer should notify HMRC that they intend to make a disclosure, giving taxpayers 90-days to follow up with an actual disclosure.
Unfortunately, HMRCs disclosure forms provide little opportunity for narrative or explanation and where there are several thousand transactions or specific issues which need to be explained. As such, using the online disclosure facility can often result in enquiries being made by HMRC before the disclosure is accepted. This process can take several months, and often in excess of 12-months.
The taxpayer will also be required to volunteer penalties and interest. Penalties can be calculated in line with the relevant regimes and will typically be in the region of 15% – 30%, but can be reduced to nil or be as high as 100% depending on the circumstances. The interest is a question of fact based on the prevailing rates at any point in time. However, one must ensure they are being reasonable in their approach, or risk HMRC rejecting the disclosure and opting to undertake a formal inquiry, which can be significantly more stressful, and place you at risk of greater penalties.
ETC Tax have substantial experience in preparing disclosures and dealing with the issues faced by cryptocurrency investors. We understand HMRCs approach and have a track record for preparing robust disclosures and having those disclosures accepted without queries. In particular:
i) Demonstrating that we have applied the correct rules and pre-empting any queries that HMRC may have to ensure prompt acceptance of the disclosure without unnecessary queries or delay
ii) Addressing common issues faced by taxpayers including inadequate or missing records and applying a reasonable or rational approach when calculating your tax liability which is often accepted by HMRC
iii) We understand the technical aspects of cryptoassets and are able to address the more complex and unique areas of cryptoassets such as liquidity pooling, crypto-gaming and NFTs, conditional and / or restrictive covenants on the sale of limited participator node-operation and securitised crypto-loans
iv) Ensuring a robust approach is taken with respect to the penalties position, which can often involve considering the information that HMRC has, or may reasonable have available to it. We have had success in arguing the lowest available penalties rate in any given circumstance
With the above in mind, we are able to make robust disclosures on behalf of clients with the view to a smooth and prompt process and ensuring the best outcomes for our clients.
To date, ETC have assisted in unique and sensitive cases including large historic and offshore non-compliance affecting crypto investors, Crypto-gaming and NFT tokens, unique mining arrangements where there are restrictions and conditions imposed on node operators and working with DeFi platforms.
If you have any queries about the disclosure and reporting of Cryptoassets, tax on cryptoassets, or tax in general then please do get in touch.
