Tax letters to be sent to crypto investors

HM Revenue & Customs plans to send letters to crypto investors asking them to check whether they have paid the correct tax.

News of the letters, which have yet to be issued, was revealed on Wednesday by CryptoUK, a trade association, accountants reported.

HMRC told CryptoUK it was taking an “educational approach” to issuing the letters. She added that her goal was to highlight areas "that people may not be aware of when considering whether they need to pay taxes."

“If you receive a nudge letter it does not necessarily mean that you have made an error in your tax return, but you must ensure that you respond to HMRC correctly,” the correspondence said.

The letters are used to encourage cryptocurrency investors to check whether they have paid the correct amount of capital gains tax (CGT) and in some cases income tax on their crypto holdings.

“In our view, it is fair to say that most underpayments are not due to deliberate evasion, but rather ignorance,” said Zoe Wyatt, partner and crypto assets specialist at Andersen UK, an accounting firm.

She warned people who receive the letter not to ignore it as doing so would likely be viewed as a deliberate act of non-compliance by the agency and result in increased penalties.

However, other tax experts said the development was a sign that HMRC is trying to crack down on possible evasion or avoidance by some crypto investors.

"It is likely that HMRC believes that large amounts of CGT and income tax from cryptocurrency investments have been undeclared for tax purposes. In some cases this could constitute criminal tax evasion," said Graham Boar of UHY Hacker Young, an accountancy firm.

"HMRC suspects there is more and more hidden wealth thanks to the rise of cryptocurrencies. Many retail cryptocurrency investors have the misconception that HMRC is unable to find out about their crypto investments and the profits they may make."

HMRC has used its intelligence gathering powers to request lists of crypto investors from exchanges in recent years.

Tax authorities also include data on crypto investors in the information they collect across borders. A Freedom of Information request from Gherson Solicitors, a law firm, confirmed this year that HMRC had used its powers to collect information on crypto investors in and outside the UK for the tax years 2017/18 up to and including 2019/20. The details included the names and addresses of investors and the value of crypto assets held.

HMRC said it wanted to help people get their tax affairs in order.

"We regularly conduct activities to educate customers who may need assistance. Our letter urges crypto asset holders to review their transactions to ensure they are declared correctly," he added.

CryptoUK was contacted for comment but did not immediately respond.