HM Revenue and Customs (HMRC) has intensified its efforts to curb tax evasion among cryptocurrency investors, sending out an increased volume of warning letters to individuals suspected of not paying their dues. In the past year, the tax authority issued 81,000 such letters, marking a 25% rise from the 65,000 sent in the preceding year, according to data obtained by accountancy firm UHY Hacker Young.
These warnings, which can take the form of letters, text messages, or notifications, aim to prompt cryptocurrency holders to declare any unpaid tax liabilities. Officials anticipate a significant surge in investigations next year as transaction data from cryptocurrency exchanges becomes more accessible.
Capital Gains Tax on Crypto
Cryptocurrency is subject to Capital Gains Tax (CGT) on any profits realized when an investor "disposes" of their assets. This includes selling, exchanging for another crypto asset, using it for purchases, or transferring it to another person. Each individual has an annual CGT-free allowance of £3,000. Profits exceeding this allowance are taxed at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
Neela Chauhan, a partner at UHY Hacker Young, noted that tax authorities suspect widespread tax evasion within the crypto investment space. She suggested that many younger traders, new to dealings with HMRC, may mistakenly believe their activities are not visible to the taxman. Some investors may also be unaware that profits from exchanging one cryptocurrency for another, or income generated from lending crypto assets, are taxable.
Future Data Access
The number of tax investigations into crypto investors is expected to increase significantly by the end of May, when HMRC will begin receiving transaction data from cryptocurrency exchanges across 52 jurisdictions, including the Channel Islands, the Cayman Islands, Ireland, and the UK. Further data from an additional 15 jurisdictions will follow a year later. This information will include investor names, addresses, National Insurance numbers, and detailed transaction records.
Chauhan stated that once HMRC possesses this comprehensive data, investigating cryptocurrency investors will become considerably easier, likening the prospect to "shooting fish in a barrel."