Taking an educational approach to crypto assets, HMRC have begun to send letters to taxpayers as a reminder of their obligation to report – and subsequently pay any tax liabilities related to – crypto assets.

Over the past decade, ‘crypto’ and ‘cryptocurrency’ have become part of everyday conversation, with the market for crypto ‘mining’ and transactions increasingly expanding. When the concept first came to the fore, it was predominantly due to the fact that the exchange of cryptocurrencies was thought to be untraceable.

Since then, however, cryptocurrency and crypto assets have entered the mainstream and become widely used, with their popularity spurred on by the substantial increase to the value of Bitcoin witnessed at the tail end of 2020.

To regulate crypto exchanges and transactions and prevent them posing a risk to the UK’s financial stability, HMRC have decided to correct any ongoing misconceptions surrounding tax liabilities and provide essential guidance.

Who will be contacted and when to act?

Whilst many consider cryptocurrency to be a form of money, HMRC have determined that it is instead a chargeable asset, and so treat it as such.

This means that, in certain circumstances, you’ll be required to report the receipt or use of crypto as part of your income, gains, and losses when you complete a Self-Assessment Tax Return for HMRC.

In recent months, HMRC have set about gathering information from UK-based cryptocurrency exchanges regarding investors, and have obtained names and addresses to send out ‘nudge’ letters to taxpayers involved in transactions.

If you have used, bought, or sold crypto assets between 6 April 2020 and 5 April 2021 and have received one of these ‘nudge’ letters, you should:

  • check your reporting obligations with HMRC’s manual or your tax advisor
  • respond promptly with all the information required
  • provide evidence, if necessary

Capital Gains Tax (CGT) applies when:

  • crypto is used for the purchase of goods and/or services
  • crypto is sold for cash
  • one form is disposed of in exchange of another form of crypto
  • crypto is gifted to a person or entity

NB: for the 2020-21 tax year, UK residents were entitled to an Annual CGT exemption of £12,300

Income Tax and potentially National Insurance apply when you receive crypto from:

  • income, as part of your salary
  • financial trading
  • mining
  • landing
  • airdrops
  • staking

If you haven’t received a letter but used, bought, or sold crypto assets during the outlined period, now is the perfect time to increase your understanding of the rules and ensure tax compliance.

For further information about the status of crypto assets and how to determine if you have any related tax liabilities,
get in touch with our specialist tax team today.