It is becoming more important than ever for crypto investors to become aware of their tax reporting obligations.
This can be anything from income tax payable on mining, staking, and significant trading activities, to capital gains tax payable on simply exchanging one digital token for another.
If an investor buys and sells tokens on a regular basis, HMRC may also deem that individual as a self-employed trader, having to pay higher rates of Income Tax compared to CGT. It is vital to get the classification right. The tax rules surrounding cryptoassets can be open to interpretation, but getting this interpretation wrong can be costly.
The growth of the cryptoasset market has created significant challenges for HMRC in the past. They aim to keep up with the ever-changing technological space in order to tackle tax evasion, avoidance, and non-compliance.
In response, HMRC have recently introduced further plans via a targeted campaign to clamp down on crypto investors. Mainly those who may have unintentionally (or intentionally) slipped under the radar.
They are known recently to have sent over 8,000 nudge letters to individuals failing to disclose their crypto tax liabilities. Resulting in potentially collecting penalties of up to 100% of the tax due (or more if the holding was offshore).
This is just one of the potential consequences if people do not declare what they are required to, and is showing that their plans to accelerate investigations are fully underway.
There has also been talk that the government is proposing a penalty system for non-compliance. With one-off single penalties of up to £5,000 with subsequent daily fines of £600 for continued failure to comply.
HMRC are planning to introduce a new crypto section on self-assessment tax returns to support those estimated five million crypto investors in the UK. They also launched a voluntary disclosure service last November for taxpayers to declare historic unreported matters.
In addition, HMRC is consulting on the implementation of global transparency rules, which mean crypto platforms will have to share client data with HMRC. The OECD’s crypto-asset reporting framework is set to be introduced fully from 2027, making it more likely individuals will no longer be able to evade the tax authorities’ attention. HMRC will use this data to identify non-compliance.
If you have undeclared crypto liabilities, or were even unaware of your obligations, it is becoming more important than ever to ensure you are compliant with HMRC.
If you have received a letter from HMRC, we would highly recommend seeking advice from a tax professional.
Without access to professional tax advice, individuals can be caught out by the complex tax rules, which can be difficult to interpret as a layperson.
Here at ETC Tax, we have a team of supportive advisers with the expertise to guide you through this process.
If you would like a free informal chat, please do not hesitate to contact us.
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