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How has HMRC’s stance on crypto tax has changed?

In 2014, HMRC likened cryptoassets to gambling, suggesting that it was a highly speculative transaction, which led to the belief that crypto trading gains were not subject to taxation.

As cryptoassets continued to grow in popularity, the need for HMRC to clarify their position on crypto tax was evident. They now explicitly state that gains from buying and selling crypto assets are taxable (likely subject to capital gains tax), and the practice is no longer considered similar to gambling.

Do you have to pay taxes on Crypto?

Even though financial institutions do not consider cryptoassets to be money or currency, HMRC classifies them as taxable and treats them similarly to shares. Depending on the type of transactions made, they will be subject to Capital Gains Tax and/or Income Tax.

How Much Tax Do You Pay on Crypto in the UK?

If your capital gains surpass the £6,000 tax-free allowance, you’ll be subject to pay 10% or 20% tax. Any additional income that exceeds the personal allowance will be taxed according to your Income Tax band, which ranges from 20% to 45%.

It should be noted that for the 2024/25 financial year, the tax-free allowance for capital gains has been reduced to £3,000. Also, don’t forget to report your losses so you can use them to offset future gains.

Is HMRC able to track crypto?

Yes, HMRC can track cryptoasset transactions. Through a data-sharing program with UK exchanges, HMRC has access to transaction data from as early as 2014 and ‘Know Your Customer’ information provided during exchange or wallet sign-ups. Using the information from exchanges such as Crypto.com, HMRC can monitor crypto activity and target those who aren’t fulfilling their tax obligations. This has resulted in ‘nudge’ letters being sent out by the tax authority, which requests that these individuals and companies report their crypto activity.

How can SG Umbrella help?

Whether you are currently trading with cryptoassets, or have done so in the past, you must complete a tax return and declare your assets. Here at SG Umbrella, our specialist tax team can offer advice on your crypto tax return, or complete it for you. Get in touch with us today to see how we can help.

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So if you’ve already taken the leap and invested, do you understand the tax implications? HMRC are quickly realising how much profit people are making, and therefore how much tax money there is to be had. In this blog we take a closer look at crypto, the nudge letters HMRC have been distributing, and what you should do if you receive one.

What are HMRC nudge letters?

Should HMRC have reason to believe you’ve made undisclosed profits on cryptocurrency and therefore owe tax, they may have sent you a nudge letter. In total 8,329 letters have been sent out, and HMRC have been collecting the data from crypto exchanges for the past 3 years.

If you currently own crypto and have previously sold any of your digital assets, you may not be aware that you owe Capital Gains Tax, or if HMRC consider you to be a ‘crypto trader’ then the amount of tax you’ll owe will be significantly more in the form of income tax on your holdings. If you generate interest from ‘staking’ your crypto, mine crypto, receive any amount of airdropped crypto, or trade large amounts on a regular basis, you may be subject to paying tax.

Since 2022 it’s predicted that 4.97 million people in the UK own some form of cryptocurrency, so it’s well worth HMRC’s time to start investigating further.

What do the letters say?

The letter will either indicate that you currently, or have previously held cryptoassets. The following three instances may indicate that a taxable gain has occurred:

1. If you currently are / or have traded cryptocurrency in the past – i.e. you’ve sold your crypto assets for a higher value then you originally purchased it for
2. If you swap your current form of cryptocurrency for another
3. If you use your cryptocurrency to purchase something

These three points are all examples of crypto disposals. Point 1 is a traditional disposal, whereas points 2 and 3 are examples where HMRC want to increase awareness. It’s considered that cryptocurrency has been sold at the point at which a transaction has taken place, and therefore either more cryptocurrency has been accrued, or something has been purchased by the owner. The Capital Gains Tax rule would apply to both scenarios.

How much tax is therefore due?

Receiving a nudge letter won’t mean you automatically owe tax, but it is worth considering if you need to report your gains and losses to HMRC. The Capital Gains annual exemption for the current tax year (2023/24) is £6,000, which will be reduced to £3,000 for the 2024/25 tax year. Should your net gain exceed this amount, you’ll need to report this to HMRC via your self-assessment tax return. If your proceeds exceed £50,000 and your gains are still below the annual exemption amount, you’ll still need to report it to HMRC.

At SG our cryptocurrency experts will be able to look at the big picture, and advise you on what action you need to take in order to stay on the right side of the taxman. For more information on whether you owe tax on your cryptocurrency, take a look at our sister company SG Accounting’s blog or get in touch with our team.

What’s the next step?

It’s predicted that the next step will be HMRC sending out enquiry letters, which will request greater detail from yourself regarding your cryptocurrency holdings. Whilst it might be tempting to withhold this information, with HMRC’s access to data becoming greater and greater, it’ll become harder to hide from them.

Tax evasion is treated extremely seriously by HMRC, and anyone claiming to not understand their tax responsibilities on their crypto moving forward can expect the usual heavy fines and unpaid tax bills.

How can SG Umbrella help?

SG’s team of accountants are one of the few in the UK who are able to offer exclusive access to crypto tax experts, so whether you’ve invested in the past, currently hold investments, or are thinking about it in the future, get in touch with us.

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