Have you received a cryptoasset tax ‘nudge’ letter from HMRC?

If you’ve traded cryptoassets for a profit, you might assume that any gains you make are tax-free. However, this is not the case.

With HMRC issuing ‘nudge’ letters to people who have traded crypto, Kerry Newman, Head of SG Accounting explains how such assets are treated for tax purposes.

HMRC’s stance has appeared to change over time

In 2014, HMRC’s initial guidance on cryptoassets (such as Bitcoin) suggested that any transaction gains might be treated in a similar way to gambling.

This led many to believe that crypto trading gains were tax-exempt. However, as cryptoassets gained mainstream traction, HMRC refined its position.

HMRC now explicitly states that buying and selling cryptoassets such as cryptocurrency and bitcoin is not analogous to gambling. As a result, any gains you make are taxable and typically subject to capital gains tax (CGT).

How are profits taxed?

In short, yes, cryptoassets are taxable. Although financial institutions may not recognise them as legal tender, HMRC treats cryptoassets similarly to shares.

This means they are subject to Capital Gains Tax and/or Income Tax, depending on the nature of the transaction.

The type of tax you need to pay depends on your specific crypto transactions.

For capital gains exceeding the 2024/5 £3,000 tax-free allowance, you’ll incur a 10% or 20% tax rate.

If your proceeds exceed £50,000, but your gains are below this annual exempt amount, you must still report your gain to HMRC via self assessment.

Additional income from crypto, surpassing the personal allowance, is taxed between 20% and 45%, based on your Income Tax band.

If you make losses on crypto investments, it is worth reporting them to HMRC so that they can be offset against future gains.

HMRC’s can track cryptoassets

HMRC has developed robust capabilities to monitor cryptoasset transactions. Using data from exchanges such as crypto.com, the taxman can effectively track crypto activities and identify investors who have not declared gains.

HMRC can also access transaction data going back a decade via data-sharing with UK-based crypto exchanges. They also have access to information collected from new users during sign-up and registration processes (‘Know Your Customer’ rules).

New rules also came into play earlier this year, requiring crypto platforms to collect customer data and provide reports to HMRC by the end of January 2025.

Over the past two years, HMRC has issued ‘nudge’ letters to taxpayers who might owe tax on their crypto activities – based on data collected via the processes mentioned above.

HMRC ‘nudge’ letters

HMRC issues ‘nudge’ letters when it suspects undisclosed profits from cryptocurrency investments. Following three years of data collection from cryptocurrency exchanges, 8,329 such letters have been dispatched to date.

Many cryptocurrency owners may be unaware that they owe Capital Gains Tax on selling digital assets. Furthermore, those classified as ‘crypto traders’ by HMRC face additional income tax on their gains.

Tax obligations may also arise from cryptocurrency mining, interest generated from ‘staking’, receiving airdropped crypto, or engaging in frequent, high-volume trading.

According to the FCA, an estimated 4.97 million UK residents owned some form of cryptocurrency as of 2022, so it’s unsurprising that HMRC has turned its attention to this burgeoning market.

What do these letters say?

These letters typically indicate that the recipient either currently holds or has held investments in cryptoassets. They highlight three scenarios that may result in a taxable gain:

1. Trading cryptocurrency for profit
2. Exchanging one form of cryptocurrency for another
3. Purchasing goods or services using cryptocurrency

Points 2 and 3 are particularly noteworthy, as HMRC considers these transactions as disposals subject to CGT.

HMRC’s future plans

HMRC’s campaign against unpaid cryptocurrency tax is expected to escalate, with nudge letters potentially followed by more detailed enquiry letters. As HMRC gains greater access to data, evading their scrutiny will become increasingly difficult.

Always seek professional advice

For obvious reasons, we recommend seeking professional advice if you have made gains from cryptoasset dealings. A specialist accountant can help you work out your tax position related to cryptoassets and advise on current and future HMRC rules and campaigns.