Background
It has recently been revealed that HM Revenue & Customs (HMRC) intend to send out “nudge letters” in the next month to those individuals who have invested in cryptocurrency. This is to remind individuals of the need to declare and pay the correct amount of income tax and capital gains tax (CGT) on any income they have received from their crypto asset holdings.
HMRC have stated that they want to help individuals get their tax affairs right and have used nudge letters in recent years for other areas such as offshore bank account holders and owners of rental properties. The letters are intended to educate and remind taxpayers of their responsibilities to report income or gains through self-assessment or, if they are not registered for self-assessment, to notify that they have transactions to report.
Detail
HMRC suspects that there is a growing amount of hidden wealth due to the increase in demand for cryptocurrencies. Many investors may be unaware that gains made as a result of disposals of cryptocurrency are usually subject to capital gains tax, or that the tax implications in some cases may be more complex.
HMRC will start to send out nudge letters this month to any individual who has bought cryptocurrencies, which it refers to as ‘crypto assets’. Whilst HMRC does not consider crypto assets to be money or currency it has stated that tax is payable on any profit received from the disposal of cryptocurrencies. This includes when they are sold, exchanged for another crypto asset, or when they are used to buy goods or services.
Any taxable gain or loss should be reported on an individual’s self-assessment return since any omissions can result in penalties being imposed by HMRC. Individuals should therefore review not just their transactions for 2020/21 but also for earlier years to ensure no income has been missed.
HMRC has the ability to obtain information from UK-based cryptocurrency exchanges and other financial organisations about those who have bought or sold cryptocurrency. The information HMRC will receive is not detailed and does not enable them to determine the reason for the transaction or whether someone has made a gain or loss from their holdings. A nudge letter therefore is a reminder that a recipient may need to make a declaration to HMRC and highlights that HMRC is checking on them.
If you receive a nudge letter, have invested in cryptocurrency and want to know if you need to declare any income to HMRC or would like more information on the tax implications of cryptocurrency, please contact our Tax Director, Jenny Marks.
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