Cryptoassets under the HMRC microscope

More and more people are dabbling in cryptoassets, but few realise they may have tax to declare.

In a recent survey, HMRC found that one in ten UK adults own or have owned a cryptoasset. The majority of the owners (63%) also reported making a profit within the past year when disposing of their cryptoassets. However, less than half (42%) were aware that tax liabilities arise when purchasing goods and services using them.

Capital gains tax is the principal tax likely to apply to investments in cryptoassets. Despite this, over half (59%) of crytpoasset owners know little or nothing about CGT. More worryingly, only 28% had seen HMRC’s guidance on the tax treatment of cryptoassets, and only 16% had sought tax advice in respect of their holdings.

An area of concern for HMRC

Understandably, HMRC sees this as an area of concern and over the past few years it has sent nudge letters to individuals it suspect may have failed to declare taxable cryptoasset transactions. According to accounting firm UHY Hacker Young, the taxman has sent a total 8,329 letters since 2020/21.

The Treasury has estimated that tax non-compliance on the number of cryptoasset holdings could range from “as high as 55% to 95%.”

Daniel Howitt, chief executive and co-founder of crypto tax software provider Recap, said in the Financial Times: “Over the past 10 years, for most people with crypto it’s been almost voluntary to pay tax. There’s been no repercussions but things are changing quite dramatically as HMRCs gain access to better analytics.”

The recent reduction in the annual exemption for capital gains tax to £3,000 may also means more individuals need to declare.

Cryptoassets and the self-assessment form

This tax year, self-assessment tax return forms will feature a standalone sections for individuals and trusts which have disposed of crypto assets. Previously, the sale of cryptocurrencies were reported alongside a range of ‘other’ assets and reliefs. The change makes it harder for investors to overlook reporting requirements.

In addition, HMRC agreed a joint statement with 48 countries to help combat criminals using cryptoassets to evade and avoid billions in missing tax. The Cryptoasset Reporting Framework will mean crypto platforms will need to start sharing taxpayer information with tax authorities, which is not currently the case. It is expected to take effect from 2027.

The hope is the framework will provide the tax authority with access to standardised information to help them tackle tax non-compliance.