After the IRS’ crackdown on crypto tax defaulters, it’s now the turn of UK's tax authority, the HMRC (Her Majesty’s Revenue and Customs). The tax agency is now looking to identify cryptocurrency traders who made gains from crypto trading between 2017-19 but haven’t paid taxes.
What steps is the HMRC taking?
The HMRC has recently sent out requests to popular crypto exchanges Coinbase, eToro, and CEOX.io. In these requests, the agency has asked for names of all clients who live in the UK along with their cryptocurrency transactions between 2017-2019. This move is very similar to what the IRS (Internal Revenue Service) did a few years ago when it requested Coinbase to share information about crypto traders.
What could be the next move?
This request for information from crypto exchanges seems to be the next step in a series of carefully planned moves. To begin with, the HMRC published a paper in December 2018 to clearly define how crypto-assets are taxed. This served to clarify a lot of ambiguities with regard to crypto taxation in the UK.
Now the HMRC has begun to identify taxpayers in the country that dabbled in cryptocurrencies but did not declare them. It’s important to note here that the HMRC seems focussed only on the last 2 years, which means that early crypto traders (those who entered the game around 2012-13) might not be affected. It won’t be surprising at all if the HMRC’s next move is very much in tune with how the IRS is approaching crypto tax evaders.
In August of this year, the IRS began sending out letters to more than 10000 US taxpayers urging them to amend their tax returns or potentially face penalties. The letters were mosly warnings - although some users have reported receiving notices as well - to users of Coinbase whose data the IRS had gained access to via a court order against Coinbase a few years ago.
It’s quite likely that the HMRC will go the same route and send letters to targeted crypto owners in the near future. For taxpayers this may mean they have to amend previous filings, pay tax on the gains they have failed to disclose, and maybe even pay penalties.
What does the penalty for non-compliance look like?
While the tax itself is just a capital gains tax of 20% on the profits from the sale of cryptocurrency, there is also a question of penalties. If the HMRC finds out that a taxpayer has failed to disclose their gain, they might have to pay penalties up to 200% of the total tax. What’s more, tax evaders might also face criminal charges and jail time. The December 2018 guidelines issued by the HMRC have made it very clear that there will be no tolerance for those who don’t comply with the crypto tax regulations.
The fact that HMRC has requested exchanges for information about crypto account holders means that it is serious about pursuing tax evaders. But it also means that there is a small window for people who haven’t filed their returns correctly to make amendments. If they do so immediately, they will only have to pay the 20% capital gains tax.
As per HMRC guidelines, you can use the Digital Disclosure Service (DDS) to disclose information that you haven’t included in your tax returns. This means that if you make unilateral disclosures at this point, you will either be able to avoid penalties completely or get them reduced significantly.
If you haven’t been maintaining a thorough record of your crypto transactions, or are confused about the exact regulations, don’t panic. Start by getting acquainted with the basics or consulting a tax professional. If you have a lot of trades, you may also benefit from using automated crypto tax software like Koinly to generate your capital gains.
As long as you act soon, and do a thorough job, there should be no problems in the future.