In November 2021 the first HM Revenue and Customs (HMRC) “nudge” letters for cryptoasset holders in the UK will start hitting doormats; a low tech warning shot for the most digitally engaged investors to make sure they have their tax affairs in order.
What is a Nudge letter?
A ‘nudge’ letter is a standard letter sent to a large group of UK taxpayers by HMRC.
HMRC have been using this tactic more frequently to try and reduce the tax gap – the difference between the tax the government believe should be due compared to what is actually paid by UK taxpayers.
A nudge letter is NOT a tax enquiry into an individual taxpayer’s affairs. It asks taxpayers to consider if their tax affairs are up to date. HMRC are “nudging” taxpayers they believe may have more work to do to fully disclose an area of tax (in this case crypto transactions) correctly.
Who might receive a letter?
HMRC are now able to approach UK based crypto exchanges to get lists of UK cryptoasset holders. They will combine this information with information they hold on which taxpayers have reported crypto transactions under Self Assessment Tax Returns. We would expect that any discrepancy will generate a ‘nudge letter’.
This information sharing may come as a shock to some taxpayers – especially given a key appeal of crypto (and its dictionary meaning) is secrecy.
What sort of crypto transactions would be relevant to tax?
It’s significant that HMRC use the term “cryptoasset” rather than the commonly used term “cryptocurrency”. This is partly because it covers not just assets that are marketed as currencies, but also non-fungible tokens (NFTs) such as artwork, music etc that are an emerging asset class.
More crucially, HMRC’s view is that bitcoin etc are not currencies and this increases the number of transactions where tax may be due (when compared to using currency).
Types of crypto transactions relevant for tax include:
- Sale of cryptoasset/currency
- Exchange of one cryptoasset/currency for another, even if never cashed out to sterling
- Use of cryptoasset/currency to buy goods, services or donate to charity.
- Any rewards/returns (including staking rewards) from being involved in the operation of the blockchain etc.
Due to the way that crypto is marketed and the high risk nature of some transactions, many taxpayers may have mistakenly heard that crypto activity is not relevant for tax as it is gambling. Gambling returns are exempt from tax in the UK. Even though many users are dealing in crypto in a similar way to their approach to gambling apps, HMRC are adamant that crypto will never qualify as gambling.
Each type of crypto transaction needs to be reviewed carefully to consider if Capital Gains Tax or Income Tax will be relevant, with resulting differences in rates of tax due, and how relief for losses can be obtained.
What should I do if I receive a letter?
The nudge letter does not necessarily need a response, but this certainly does not mean it can be ignored. It is an indication that HMRC may enquire into your tax affairs in the near future.
We have not yet had sight of the November crypto nudge letters, but some nudge campaigns have included a ‘certificate of tax position’. PEM recommends that clients do not sign such a declaration as this could have significant consequences should errors or omissions later be discovered.
If you receive a letter, PEM can review whether any action needs to be taken. If work is needed to bring your tax affairs up to date, our Private Client team are experts at dealing with HMRC on your behalf. This includes making sure you are in the best possible position regarding any penalties that could be imposed for underpaid tax.
Of course, there is no need to wait to receive a letter. If you have cryptoassets and are concerned that these may not have been reported correctly to HMRC please contact PEM so that we can assist you with bringing your tax affairs up to date.