- HMRC scrutinizes undertaxed crypto
- “Nudge” letters target tax compliance
- New regulations automate tax disclosure
HMRC has increased its scrutiny of cryptocurrency speculators whose assets it believes have been undertaxed.
A few years ago, the tax office began accumulating information on cryptocurrency traders; it is now focusing on them to verify that they have paid their taxes accurately.
Based on information from the accounting firm UHY Hacker Young, HMRC has distributed 8,329 “nudge” letters to individuals whom it suspects owe tax on their cryptocurrency assets.
If deemed a crypto “trader” by HMRC, certain crypto holders might be unaware that they owe capital gains tax on the sale of assets or even income tax on their holdings.
Traders who engage in cryptocurrency mining, stake their cryptocurrency to earn interest, or trade substantial quantities regularly may be liable to pay income tax.
Recently, it issued a call for British citizens to report any unpaid taxes on cryptocurrency assets, including exchange tokens, utility tokens, and NFTs.
The December 2023-introduced voluntary disclosure mechanism encourages individuals to inform HMRC of any unpaid taxes on crypto-related income or gains.
Warnings and Inquiries by HMRC
According to Neela Chauhan, a partner at UHY Hacker Young, the ‘nudge’ letters will likely be followed by ‘inquiry’ letters from HMRC requesting specific information regarding taxpayers’ cryptocurrency holdings.
She stated, “Over the next few years, HMRC will only grow more determined to intensify its tax crackdown on crypto investors.”
“As HMRC acquires additional data, cryptocurrency traders will be unable to elude the scrutiny of the tax authority.”
Crypto investors may not realize their digital assets’ tax liability, leading to noncompliance.
While HMRC may grant temporary leniency, for instance via its voluntary disclosure mechanism. Such concessions are improbable to endure over an extended period.
A hefty penalty will be assessed on top of the tax that investors already owe. This is if they do not have a comprehensive understanding of the taxes they are obligated to pay.
According to research conducted by HMRC in July 2022, one in ten Britons owned crypto assets.
Men exhibited a higher prevalence of ownership compared to women, with a greater concentration observed in lower age groups.
Tax Oblivion: Unaware UK Holders
Three-fifths of crypto asset holders in the United Kingdom were unaware, however, of the tax implications of trading cryptocurrencies.
The taxation of crypto assets can be governed by complex regulations, but HMRC treats cryptocurrencies similarly to other financial assets.
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HMRC appears to be issuing “nudge” letters regularly to persuade taxpayers to examine their tax affairs more thoroughly.
The preceding year witnessed a substantial surge in the volume of correspondence. It was directed towards online marketplace vendors whom the organization suspected of failing to report tax.
The implementation of new regulations on January 1st mandates that platforms gather user information. Which they will be obligated to disclose directly to HMRC starting in January 2025.
This information was previously obtainable at the discretion of HMRC; however, under the implementation of new regulations, the process will be automated, facilitating the taxman’s pursuit of resellers who fail to remit tax.
