HMRC reminds investors in letter that they must pay tax on their cryptocurrency profits

Her Majesty’s Revenue and Customs (HMRC) is reminding investors who have not declared or paid tax on cryptocurrency gains to do so.

HMRC has written a letter to investors reminding them that they may need to disclose or pay tax on any profits they have made after selling some of their crypto assets.

It says that if an assessment concludes there are additional capital gains or income taxes payable on previously undisclosed cryptocurrency gains, they may be required to pay interest on late payments and other penalties.

According to tax consultancy BDO, the letter is addressed to those who HMRC knows have “disposed of” crypto assets.

HMRC’s letter begins with this line: “We are writing to you because our records show that you have disposed of cryptoassets. However, you have not declared everything correctly. This means that you may have to pay tax.”

The disposal or receipt of cryptocurrencies is generally treated the same as other ordinary assets for tax purposes.

HMRC states in its letter: “If you make a disposal of cryptoassets, you may have to tell us about it and pay Capital Gains Tax (CGT) on any gains you make.”

The letter continued: ‘You may be required to pay income tax and national insurance contributions if you engaged in crypto-asset-related activities that generated income.

‘For example, income from lending, staking and mining crypto assets. This can also be due to employment that generated an income paid in the form of crypto assets.’

Tax consultancy BDO added in its own statement: “Such transfers will include circumstances where individuals have exchanged one cryptocurrency for another or have paid for a product or service using cryptocurrency.”

When do you have to pay taxes on cryptocurrencies?

HMRC considers profits or losses made from buying and selling exchange tokens to be within the scope of capital gains tax.

Its guidance, BDO said, states that HMRC will only accept the purchase and sale of cryptocurrencies as constituting a transaction for tax purposes in exceptional circumstances.

For those who are convinced that they do not have to pay tax related to cryptocurrencies, HMRC said: ‘If you are sure that you do not have to pay tax related to cryptoassets, please contact us using the details shown later in this letter. To support this, we ask that you include information showing why you do not have to pay tax on your cryptoasset activities when you contact us.’

Anyone who receives the letter from HMRC should not ignore it.

Paul Falvey, tax partner at BDO, said: ‘Many cryptoasset owners may not be fully aware of their obligations and may not have filed a tax return before.

‘You may be in for a surprise when you receive this letter, but the worst thing you could do is ignore it.

‘To update their tax situation, individuals may need to obtain reports from their financial advisors or online platforms.

‘In certain circumstances, affected individuals would be well advised to seek specialist advice on the most appropriate disclosure mechanism to use.

‘If additional tax is due, HMRC may charge interest on late payments and impose tax penalties. These penalties can be as high as 100 per cent of the tax owed, or more if the holding was based overseas.’