Does HMRC have my cryptoassets in its sights?by
HMRC has launched a nudge letter campaign focusing on people it believes have cryptoassets. What is behind the tax authority’s crypto push? And what steps should you take if you or your client is targeted?
The taxation of cryptoassets is complex and may not be as intuitive as some think. For example, did you know that buying an NFT can create a tax charge? This can lead to an unexpected, and unwelcome, brown envelope on the doormat.
There are two main letters that you or your clients may receive: either an enquiry notice or a nudge letter. An enquiry letter is particularly unpleasant because HMRC will ask questions and expect answers.
Slightly less menacing are nudge letters, which are intended as a prompt to take action. This is not an enquiry and, whilst it is recommended to make sure all tax affairs are up to date, does not mean that HMRC always requires, or expects, a reply. Nudge letters are either targeted to a particular risk that needs to be corrected or are “educational” to identify common errors.
Nudge, nudge, wink, email?
The last cryptoasset nudge was in December 2021, and HMRC is now undertaking the second nudge campaign. A big surprise here is that HMRC has sent them by email - hopefully, they haven’t been caught by overenthusiastic spam filters. Thus far, the number of emails sent is unclear, but HMRC does not just send a nudge to everyone. These target people they believe have cryptoassets (granted at times it does get the wrong person!).
Like in 2021, it is an educational nudge highlighting common errors and does not require a reply. However, reviewing your tax affairs (or those of your client) is sensible as HMRC can track who does, or does not, amend their tax return. Mistakes can be easily made, as not all cryptoasset owners are aware of the fact that crypto-to-crypto transactions are taxable (a common misnomer). If there are concerns that tax has not been declared, then check the previous tax return and, if necessary, make a disclosure.
If there is a tax liability, it is best to come forward before HMRC opens an enquiry. The reason to make a disclosure is that the penalties can be lower, possibly even nil. This is because if HMRC subsequently opens an enquiry and finds an error, the failure to take action following a nudge letter could lead to higher penalties being charged (potentially up to 200% of the tax due). Penalties are based on facts and circumstances, making it advisable to seek advice.
Disclosures need to be carefully considered to ensure that a full disclosure has been made and all relevant information is provided in a timely manner. HMRC recently set up a new disclosure service for cryptoassets, so the focus on crypto is not going away. If there has been a deliberate understatement, then use the Contractual Disclosure Facility to provide some degree of protection from prosecution.
But they won’t find me... will they?
HMRC gathers information from a wide range of sources. It can pull information directly from cryptoasset exchanges and can also use international tax treaties to gather data. The recent announcement from HM Treasury on the Crypto Asset Reporting Framework (CARF) highlights the push for tax transparency on cryptoassets. More than 50 jurisdictions have agreed to ratify CARF, with HMRC receiving a large amount of information. Once added to Connect, HMRC’s data analysis tool, the tax authority will be able to match and risk assess taxpayers in the data.
The world of cryptoassets is becoming ever smaller and more visible. Disclosures remain a tricky business and it is always good practice for individuals to seek professional advice if they receive a nudge or enquiry letter.
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Dion is crypto and digital assets technical director at Andersen in the UK. He has extensive tax technical experience in cryptoassets and was formerly the cryptoasset policy and product owner at HMRC. He brings unparalleled in-depth knowledge on direct and indirect taxation for individuals and businesses, the...