They seek it here… they seek it there – HMRC nudge letters and crypto

In this article we cover HMRC’s use of “nudge letters” to inform individuals about their tax obligations, particularly regarding cryptocurrency transactions. HMRC has obtained data from crypto exchanges and sent letters to around 8,300 people, urging them to declare their crypto gains within 60 days to avoid potential enquiries.

Our Crypto Tax expert Nicola Goldsmith also highlights the complexity of crypto tax calculations and advises seeking professional help to ensure accurate reporting and avoid penalties.

Many people over the last few years have been made familiar with a ‘nudge letter’ from HMRC.  This is a letter that basically says ‘we think you have x, y or z’ from whichever source is relevant to the campaign.  Let properties and overseas income are two of the most common ones. 

HMRC, who we have noted before, have contacted various crypto exchanges and obtained information about people who have been buying, selling and exchanging cryptocurrencies, have used that information to ‘educate’ those individuals about their tax obligations regarding crypto and directed them to read the crypto tax guidance.  However, more recently, HMRC have started sending letters regarding this to people whose names have been disclosed to them requiring them to declare that they have declared such gains, or that they will do so (reports suggest that around 8,300 people have been contacted so far), within 60 days.  Failure to respond may result in an enquiry. 

Based on other nudge letters, this does not mean that they have not declared their cryptocurrency gains (HMRC notoriously does not check this before sending the nudge letter), but it is a call to action, not just to the people who have received letters, but also to all those who have not declared their crypto gains or income to HMRC.  Given that some people have been trading for years, and never declared anything, just because they have never cashed out doesn’t mean that they don’t have a crypto capital gains tax charge, or an income tax charge.

If you have received a nudge letter or think you might, contact your local Haines Watts office, or our expert Nicola Goldsmith direct, for advice on how to handle your crypto tax reporting and avoid potential penalties.

Crypto tax reporting has often not been done because people do not realise that every time they use one crypto to buy another, this is a disposal of an asset – the crypto they have just sold.  Because this is a volatile market, there may be a large price difference between the cost price and the sale price in Sterling terms, and that difference is taxable, even if the funds are not transferred back into Sterling.  Even more importantly, crypto is treated as being in the same country as the individual’s residency, even if held on a server or exchange outside the UK.  These crypto tax errors may mean that some people have not paid tax on their crypto gains.

HMRC are concerned about this, and have set up a crypto tax disclosure facility, allowing individuals to declare their gains on crypto and NFTs, which is also an interesting development.  Given how many transactions some people make in a year (we have seen well in excess of 10,000), it will be interesting to see how they pursue this, and whether they seek to check any calculations.  This is similar to the worldwide disclosure facility which was set up to allow people to disclose their offshore income and gains some years ago.

It is important to get the calculations right – we have been consulted by someone asking about whether to use methods that do not apply in the UK, because they read US websites.  Most people will not be treated as running a business, mainly because of how speculative this is. 

However, even capital gains tax is not simple.  When you buy and sell assets which are interchangeable (fungible assets) like foreign currency and shares, you do not sell the oldest acquisition first if you are not selling the whole holding.  There are complex matching rules which mean that effectively you sell the most recently acquired crypto within that class first, and for the rest, the cost is averaged.  This is obviously very complex as the average cost changes every time a sale is made.  What this means is that the gains are often less than people realise, but also that their biggest gains are still sitting in their crypto wallets.  So there still could be plenty of surprises in store in terms of tax.

The moral of the story?  Take advice regarding the tax on your crypto, and if you have received a nudge letter, best do this sooner rather than later.  Its better than HMRC looking into it without your help, as this will lead to higher penalties.

Contact your local Haines Watts office, or our Crypto Tax expert Nicola Goldsmith to explore the most cost-effective way to update your taxes. 

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