Received a HMRC Crypto Letter? Here's What To Do
If you've received an HMRC nudge letter regarding your cryptocurrency transactions, it's crucial to act swiftly. HMRC has ramped up its efforts to ensure that crypto holders are paying the correct amount of tax, and their recent HMRC nudge letter campaign is targeting individuals suspected of underreporting or failing to report their crypto gains. Here's what you need to know and the steps you should take.
What's in the crypto nudge letter?
The HMRC nudge letter warns recipients that if an investigation reveals that additional capital gains tax (CGT) or income tax is due on previously undisclosed crypto transactions, there may also be late payment interest and penalties to pay. This letter is part of HMRC’s broader initiative to close the tax gap related to cryptocurrency investments.
The HMRC nudge letter highlights that disposals—such as selling crypto for profit, exchanging one cryptocurrency for another, or using cryptocurrency to pay for goods or services—can all trigger taxable events. HMRC is urging recipients to review their tax position and correct any oversights immediately.
Failing to act on the HMRC nudge letter could lead to significant consequences, including penalties of up to 100% of the tax due or more, especially if the crypto assets are held offshore. Furthermore, HMRC can investigate up to 20 years of past taxes in cases of significant non-compliance.
HMRC nudge letters target crypto holders suspected of underreporting gains.
They focus on disposals, including selling, exchanging, or using crypto for purchases.
Ignoring the letter could result in severe penalties and even a 20-year investigation period.
Can HMRC track my crypto?
Yes, HMRC has the ability to track cryptocurrency transactions. As the crypto market has generated considerable wealth for many investors, HMRC is actively working to recover any unpaid taxes on crypto gains.
In November 2023, HMRC introduced a new disclosure facility specifically for individuals with irregularities in their tax reporting due to crypto transactions. This facility offers more favourable settlement terms for those who voluntarily come forward. It’s highly recommended to take advantage of this facility if you have any concerns about your crypto tax reporting.
The launch of this disclosure facility marks HMRC’s commitment to cracking down on crypto tax evasion. In addition to gathering information from crypto platforms, the UK government has joined the international Crypto Asset Reporting Framework (CARF), which allows for the automatic sharing of information about crypto assets across borders. As of January 2024, HMRC has sent more than 8,000 HMRC nudge letters to individuals suspected of owing tax on their crypto gains, underscoring the need for crypto holders to ensure their tax affairs are up to date.
With HMRC now armed with more data and international cooperation, it's never been more important to review your crypto tax position and ensure you are fully compliant.
HMRC can track crypto transactions through data-sharing agreements and exchanges.
Over 8,000 HMRC nudge letters have been sent to suspected under-reporters.
The disclosure facility offers favourable terms for voluntary compliance.
Why am I getting a crypto nudge letter from HMRC?
HMRC has been using its powers to gather data from cryptocurrency exchanges and other digital asset platforms about their customers' transactions. This data-sharing program helps HMRC identify individuals who may not have reported their crypto activities accurately. The recent HMRC nudge letters are aimed at individuals whom HMRC believes have “disposed” of crypto assets but have not declared or paid the appropriate tax.
Additionally, starting in 2026, HMRC will automatically receive data from crypto exchanges through the Crypto-Asset Reporting Framework, an OECD-led initiative, allowing even greater scrutiny of cryptocurrency transactions. The HMRC nudge letters sent out now are just the beginning of HMRC’s broader campaign to encourage voluntary compliance before harsher enforcement actions are taken.
The complexity of cryptocurrency taxation is often a reason for underreporting. While crypto is subject to CGT, some activities—like staking or trading at high volumes—can be classified as income, triggering both income tax and national insurance obligations.
Therefore, HMRC wants to ensure that all taxpayers are aware of their obligations and pay the correct tax at the right time.
What do I need to do if I’ve received a letter?
If you've received an HMRC nudge letter, the most important thing is not to ignore it. Here are the steps you should take:
1. Review your transactions
Start by reviewing all your cryptocurrency transactions from the past few tax years. You need to determine whether you've sold, exchanged, or used crypto in a way that qualifies as a taxable event. If you're uncertain, it's important to understand the tax consequences of your crypto activities and ensure they’re correctly reported to HMRC.
2. Use crypto tax software
Manually calculating your crypto taxes can be challenging, especially if you’ve conducted multiple transactions. Using a tool like Koinly can help automate this process. Koinly integrates with hundreds of exchanges and wallets, allowing you to track your transactions, calculate your tax liabilities, and generate a complete tax report in minutes.
3. Consult a professional
If your crypto affairs are complex, or you’re unsure about how to handle the tax implications of your transactions, it’s advisable to consult a qualified accountant who specialises in crypto taxation. They can guide you through the process, help you amend past returns, and ensure that you’re in compliance with HMRC regulations.
4. Engage with HMRC
If you realise you’ve underreported or failed to report your crypto taxes, proactively engaging with HMRC is crucial. Voluntarily disclosing any inaccuracies can help reduce penalties and prevent more severe actions, such as criminal investigations.
HMRC has a dedicated page where you can learn more about how to make a voluntary disclosure about your crypto dealings.
5. Amend your tax return
If you’ve identified discrepancies in your previous tax returns, you should amend them as soon as possible. HMRC allows amendments within 12 months of the original filing deadline. Filing an amended return can help you avoid additional penalties and demonstrate your willingness to comply with tax regulations.
Failure to respond to HMRC nudge letters could result in an audit, penalties, or even legal action. In cases where additional tax is due, late payment interest and penalties will also apply. These penalties can range from 100% of the tax due, and possibly more if your holdings were based offshore.
How much tax should I pay?
HMRC now explicitly treats gains from buying and selling cryptoassets as taxable, unlike their earlier stance in 2014, where some crypto gains were mistakenly thought to be exempt, likened to gambling. Today, cryptoassets are taxed similarly to shares.
As per HMRC's 2024 UK Crypto Tax Guide, here’s how your crypto transactions may be taxed:
Capital gains tax (CGT): Profits exceeding the annual £3,000 tax-free allowance (for 2024/25) are subject to CGT at rates of 10% for basic rate taxpayers and 20% for higher rate taxpayers.
Income tax: If HMRC considers your crypto activities to constitute a trade or if you earn additional income from staking, airdrops, or mining, the income is taxed at rates between 20% and 45%, depending on your Income Tax band.
Even if your proceeds exceed £50,000 but your gains fall under the tax-free allowance, you must still report them to HMRC. If you’ve made losses, it’s advisable to report these to HMRC so they can be offset against future gains.
HMRC can also track your crypto transactions using data from exchanges and UK-based crypto platforms, ensuring that tax liabilities are accurately reported. They can access data going back several years, meaning undeclared gains will eventually come to light.
How can Koinly help
Koinly simplifies the process of calculating and reporting your crypto taxes. Here’s how it can assist you:
Accurate tax reporting: Koinly tracks all your crypto transactions across various platforms and generates detailed reports for capital gains and income taxes.
800+ integrations: With seamless integrations across 800+ exchanges and wallets, Koinly ensures that all your transactions are accounted for.
Time-saving: Instead of manually calculating each trade or transaction, Koinly automates the process, helping you save time and reduce the risk of errors.
HMRC-compliant reports: Koinly’s tax reports are designed to meet HMRC standards, ensuring that you remain fully compliant with UK tax regulations.
Sign up to Koinly today to track your crypto transactions and stay compliant with HMRC requirements. Whether you’ve received an HMRC nudge letter or simply want to ensure your tax returns are accurate, Koinly is here to help.
