First Published: 8th November 2021, Last Updated: 29th Nov 2023

HMRC, the UK's tax authority, often send nudge letters as a prompt for cryptocurrency investors to ensure proper income and capital gains tax reporting for their cryptoasset activities. In our experience, letters typically start to land from around November/ December time, just ahead of tax season.

2023 has been a big year for the UK in terms of crypto regulation and tax guidanceand we know that HMRC are addressing the tax gap with high focus on cryptocurrency:

• Announcement about changes to the Self Assesment tax forms, with new reporting requirements for cryptoassets
• A joint statement from participating jurisdictions about the implementation date of the Crypto-Asset Reporting Framework, developed by the OECD for global tax transparency
• Guidance and a launch of a voluntary disclosure service for unpaid tax on income or gains from cryptoassets

Following this flurry of notable announcements from HMRC over the last few months, we predict an educational crypto letter or email from HMRC, prompting crypto investors to check guidance on cryptoassets and report unpaid tax is imminent.

In this blog, we discuss what this correspondence means and provide guidance on how to react.

1. Stay calm and informed about tax guidance for crypto

Although HMRCs first detailed guidance “the taxation of cryptoassets for individuals” arrived in December 2018, for many cryptocurrency holders, the world of taxation is relatively new and unfamiliar. Receiving an HMRC nudge letter might come as a surprise, but it's not an attempt to catch you off guard and shouldn’t be confused with a HMRC enquiry.

What is a HMRC nudge letter?

A HMRC nudge letter is issued when they believe the individual may have undeclared income and encourages the recipient to check their tax return is accurate. HMRC nudge letters have a “one to many approach” where one communication is sent to many individuals to highlight a common tax risk identified by an accurate source of information. The primary goal is to raise awareness and encourage compliance. If you have received a nudge letter relating to your cryptocurrency it is likely that HMRC have requested user information from your cryptocurrency exchange. Other UK tax payers will also be receiving the same letter. A nudge letter is not the same as an enquiry letter from HMRC; it does not mean you are being audited and it is not a statutory enquiry into your tax affairs, but equally, it should not be ignored.

Do you have to respond to a HMRC nudge letter?

Ensure you read and follow the instructions on the letter carefully. It may not be necessary to respond to HMRC, but you should review your finances and take action to ensure that you are reporting your taxable income correctly, re-filing if necessary. If you fail to take action and HMRC open an enquiry that finds errors with your tax reporting, you are likely to face higher penalties.

2. Be proactive about crypto tax

Navigating cryptocurrency tax regulations can be complex, considering the high volume of transactions and various trading strategies. It's tempting to procrastinate, but being proactive is essential. Here's what you can do:

Stay up to date with tax regulations relating to crypto

Guidance about crypto tax regulation is always evolving so makes sure you stay informed about the latest developments. Educate yourself about cryptocurrency taxation by referring to our comprehensive UK Crypto Tax Guide or HMRC's Cryptoassets Manual.

Check if you need to file a tax return for your crypto

If you dispose of cryptoassets you may need to pay you may need to file a tax return if your total capital gains/losses are more than the annual exemption allowance.

Crypto disposals subject to capital gains tax include:

• Selling crypto for fiat
• Exchanging one cryptoasset for another cryptoasset
• Purchasing goods and services using crypto
• Gifting crypto (except to a spouse or civil partner)

You’ll also need to consider any earnings received from cryptoassets as this may be subject to income tax and sometimes National Insurance Contributions.

Taxable income from crypto may include:

• Employment income received in crypto
• Mining
• Staking and lending rewards
• Airdrops
• NFTs

Calculating your capital gains from crypto can be complex especially if you have a complicated trading history and lots of transactions. You can simplify crypto taxes using crypto tax software like Recap, which calculates your capital gains and income taxes automatically. Not only does crypto tax software save you time, it also reduces the risk of errors compared to manual calculations.

Register for self assessment with HMRC

Before you can file your first tax return you need to be registered with HMRC. The deadline for this is 5th October. Follow this link to register for self-assessment.

Maintain accurate records of your crypto transactions

Good record keeping for your crypto activity means you’re better prepared for tax reporting. Crypto exchanges may only keep records for short periods of time and there’s always the risk that they may not exist when you need to file your return so it’s important to have a back up. Crypto tax software can help as it keeps your data all in one place and with consistent formatting across exchanges. HMRC state records should include:

• the type of cryptoasset
• date of the transaction
• if they were bought or sold
• number of units
• value of the transaction in pounds sterling
• cumulative total of the investment units held
• bank statements and wallet addresses

Be aware of tax deadlines, important dates and penalties for non-compliance

The UK tax year runs from 6th April to 5th April, with the tax return filing and payment deadline of 31st January the following year. When deadlines are not met, penalties including fines and legal action may apply so make sure you set some reminders.

3. Seek expert guidance

It's highly recommended to consult with a specialist crypto accountant, such as our partner, Wright Vigar, who possesses the knowledge and experience to address your unique 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 taxes. Even if your tax situation appears straightforward, a crypto-focused accountant can provide peace of mind, especially if you have a complex trading history or are filing for the first time. You may also want to discuss tax planning with your accountant to find out how you can optimise your future taxes. Some ideas to explore are realising crypto losses to offset gains; utilising annual exemptions; spouse transfers and donations.

4. Don’t believe the myths!

Avoid falling for myths and misinformation about crypto taxation. Just because BitcoinBloke123 on Reddit says HMRC can’t trace your crypto, doesn’t mean you shouldn’t comply with tax laws. Tax evasion can lead to penalties, and HMRC can look back up to 20 years. Remember that all crypto transactions are recorded on the blockchain, and technological advancements may make tracking easier. It's your responsibility to declare your taxes accurately whether they are visible to HMRC or not.

HMRC recognises the growth of cryptocurrency and its potential for hidden wealth. They have the authority to obtain information from crypto exchanges as shown in this report by Coindesk and we know that they are throwing resource into this area. If you have received a nudge letter, it’s likely that one of the exchanges you use has been asked to share information with HMRC. Whether you're only just finding out about crypto taxation or have been burying your head in the sand, now is the time to act to avoid higher penalties.

5. Confront your fears!

You may feel like you want to bury your head in the sand but getting ahead (or catching up) as soon as possible is the best way forward to minimise penalties.

Your unknown tax liability

Many crypto users are fearful of their potential tax liabilities. However, gaining clarity on the tax figure can be a relief, allowing you to plan accordingly and avoid undue stress. If the fear of the unknown is causing you sleepless nights and calculating your taxes is giving you nightmares then consider hooking up your data to Recap for automatic insight on your reportable gains. We’re privacy focused and use end-to-end encryption so you’ll be the only person who ever sees your data.

Communicate with HMRC

While interacting with tax authorities may seem intimidating, HMRC is there to help. Crypto regulation is new and still 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 hesitate to ask them for guidance. They may not be well-versed in the latest crypto trends so just hold back on the memes and expect confusion if you ask for specific guidance about your shit-coins or bored apes!

Close: planning for a tax-friendly future

With the basics of crypto tax compliance covered, you’re hopefully feeling less stressed about receiving a nudge letter and more confident about preparing your tax reports.

In conclusion, while receiving an HMRC nudge letter might be daunting, it's an opportunity to ensure you're on the right side of the law and optimise your tax situation. Stay informed, seek expert help, and plan for a tax-friendly financial future.

Our team is here to assist you with any questions you may have. While we're unable to offer individual tax advice, our app can help you understand your tax liability and we can connect you with knowledgeable accountants who specialise in cryptocurrency. Feel free to reach out to us with a message, and we'll make an introduction.