It has been announced that HMRC will be sending nudge letters to encourage crypto investors to ensure they are paying the appropriate income and capital gains tax on their cryptoasset activity. Read a copy of the letter here!

Past experience indicates that HMRC are giving crypto taxpayers an opportunity to get their taxes in order before they start a formal campaign of investigations in this area. We’re expecting these letters to land this month, (nicely in time for tax season 🙄) so here is our guide on what to do…

1. Don't panic!

Although HMRCs first detailed guidance “the taxation of cryptoassets for individuals” arrived in December 2018, crypto regulation is a relatively new and unheard of topic for many asset holders. This letter drop will come as a shock to a lot of crypto users, but it is our understanding that at this stage it is to raise awareness and encourage you to do the right thing, not an attempt to catch anyone out. HMRC have said that they want to help people get their taxes right and educate those who need help.

2. Be proactive

Crypto tax is overwhelming; the rules are a puzzle in themselves, never-mind the high volume of transactions and complex types of trading you may need to apply them to. You may feel like you want to bury your head in the sand but being proactive is best.

• Do your research and get a better understanding of cryptocurrency taxation by checking out our UK Crypto Tax Guide (with examples) or heading to HMRC Cryptoassets Manual
• Make sure you are registered for self-assessment
• Use an app like Recap, which makes accounting for your trades easy and calculates your capital gains for you
• Set yourself a reminder for the UK tax return filing and payment deadline of 31st January.

3. Get professional help

We highly recommend seeking guidance from a specialist crypto accountant like our partner Wright Vigar, who can apply their knowledge to your situation. You may find that you need to wander from your traditional accountant to source someone with a more detailed understanding of crypto regulation and experience in cryptocurrency.

Although your situation might appear simple enough to go it alone, this specialist help will give you that extra peace of mind - especially if you are filing for the first time and have a complicated trading history. They will also be able to help you with tax planning, so you can optimise your taxes in future years.

4. Don’t believe the myths!

Just because BitcoinBloke123 on Reddit says HMRC can’t trace your crypto, doesn’t mean you shouldn’t comply. Tax evasion can be penalised (and HMRC can look back 20 years) and you are responsible for declaring your capital gains, not the guy you just met online.

No-one really knows what crypto information HMRC holds, but let’s not forget all crypto activity is on the ledger and as expertise and technology develops, joining the dots could become much easier.

HMRC have realised the sudden rise in cryptocurrency and suspect there is a large amount of hidden wealth. We have already seen them using their power to seek information from crypto exchanges and we know that they are throwing resource into this area.

Most people receiving this nudge letter will be hearing about crypto tax for the first time, some will be aware of it already and actively avoiding tax - which ever category you fall into, now is the time to act.

5. Face your fears!

a. The Unknown Number

So many new users we speak to are terrified of their potential tax obligation. Gaining clarity on the figure is rarely good news, but is a huge relief to most of them. “I’m able to sleep again” is something that we hear a lot.

b. HMRC

They can’t be avoided but, they can be helpful (sometimes). Crypto regulation is new and still pretty cloudy in some areas, so HMRC are finding their feet as much as we are. In our experience, if you are honest, they are respectful - so don’t be afraid to ask them for help. Just hold back on the memes and don’t expect them to know Shiba is anything other than a dog.

Finally, lets plan for a tax friendly future

Hopefully, our tips have put your mind at rest and will help you prepare your tax reports for previous years. If next year is already filling you with dread, then stop worrying and start planning. Tax can work in your favour, so here are a couple of ideas to look into…

• Realising losses to offset any gains
• Using the annual exemption to your advantage
• Spouse transfers

Ask to discuss tax planning with your accountant... they might even give you brownie points for being so proactive. 😉