HMRC nudge letters sent to crypto investors and traders
HMRC nudge letters are being sent out to individuals who they believe may have previously purchased or are holding cryptoassets, encouraging people to review their tax position and to consider if they need to pay tax on their crypto. In many instances this may relate to the 20/21 tax year, so requires submitting a tax return before the 31 January 2022 deadline.
The letter invites individuals to determine whether they have made any disposals in the 2020/21 tax year, or earlier years and explains what they should do.
What are HMRC nudge letters and why have I received a HMRC nudge letter?
Nudge letters are used by HMRC as a mechanism to prompt individuals to review their tax affairs. These letters are usually sent out as a large campaign concerning a particular area of tax. Previous campaigns have included the disposal of property, holding buy to let property and overseas income.
HMRC can identify anomalies within an individual’s tax status, then uses this information to generate a nudge letter. Nudge letters enable HMRC to investigate an individual’s tax status before deciding whether to open a formal tax investigation.
HMRC now has greater access to historic transactions on many crypto exchanges. Many exchanges are now obliged to share data with HMRC. This provides much more information to assist in investigating an individual’s tax status and identify potential careless errors or fraud.
The aim of a nudge letter is to encourage an individual to act in reviewing their tax status. Nudge letters are also used to educate individuals regarding some of the more complex areas of tax, to ensure people are aware of their tax obligations.
When you receive a nudge letter, this does not definitely mean you have to pay extra tax or have previously made an error. You should, however, respond to HMRC correctly to help ensure that this initial enquiry does not lead into a tax investigation.
What action to take if you receive a HMRC nudge letter
Where a HMRC nudge letter is received, we recommend that professional advice is sought before returning information to HMRC. Returning incorrect information may lead to formal investigations into your tax affairs, which can include financial penalties. You should never ignore a nudge letter, as this is likely to also lead to further investigations by HMRC.
Alexander & Co can assist if you receive a nudge letter, reviewing your tax status and liaising directly with HMRC if required, where we have extensive experience.
In many situations, no further action may be required and this can be confirmed to HMRC. Where action is required to address your tax, we can advise on the most appropriate action to take.
It is imperative that detailed records are kept of all transactions. Due to the number of transactions that can occur, this can become complex and is a highly specialised area, which is often misunderstood. Alexander & Co is able to assist in reviewing such transactions.
It is always better to ensure you fully understand your tax position and pre-empt any HMRC enquiry. If you haven’t received a nudge letter, we advise that you still undertake a tax review of your crypto activity, which we can provide. To arrange a complementary initial consultation, Please contact us.
When do you pay tax on crypto?
HMRC does not consider the buying and selling of crypto the same as gambling. Depending upon how crypto is held, Capital Gains Tax, Income Tax and Inheritance tax can all apply.
Generally, people hold cryptoassets as personal investments, typically for capital appreciation or to make specific purchases. You may be liable for Capital Gains Tax, when crypto is disposed.
You will also usually be liable for Income Tax and National Insurance contributions on crypto held by individuals, when they are received from an employer as a form of (non-cash) payment, or from airdrops, transaction confirmation or mining. For Inheritance tax, Crypto is treated as property.
When disposing of a crypto, the gain or loss needs to be calculated to ascertain if Tax needs to be paid. This includes:
- Selling crypto for money
- When you exchange one type of crypto for another
- Using crypto to pay for goods/services
- Giving away crypto to another person (other than a spouse)
For example, if you were to trade Ethereum for Bitcoin, this would be a disposal for capital gains tax purposes, even if you do not then convert the Bitcoin into pounds. You might be required to disclose this transaction to HMRC and pay tax on it.
You may find the following sections of our website useful in understanding how crypto is taxed:
How Alexander & Co can assist with Crypto Tax
Alexander & Co has a specially trained team of crypto tax advisors providing industry leading advice to clients. This includes assisting clients where they have received HMRC nudge letters.
To fully understand how cryptocurrency is taxed in the UK, and how you can stay compliant in this rapidly evolving sector, our cryptocurrency tax advisors are able to assist you.
Our team at Alexander & Co is experienced in dealing with the tax issues surrounding cryptocurrency and cryptoassets. Whether you’re an investor, trader or a business, we can help you ensure your affairs are structured correctly, in the most tax-efficient way, while remaining compliant with the latest HMRC cryptocurrency legislation.