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 around November time, just ahead of tax season. In this blog, we discuss what these letters mean and provide guidance on what you should do.
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. 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 your compliance.
Nudge letters started being sent in 2017, when HMRC started to receive data under the Common Reporting Standard (CRS), an international agreement amongst global tax authorities. As HMRC does not have the resources to investigate all cases of undeclared gains and income, nudge letters are a cost-efficient way for them to target large numbers of taxpayers at once. A nudge letter puts onus on the individual to check their tax liability and do the right thing, allowing HMRC to recover underpaid taxes without the cost of an enquiry.
You may be sent a nudge letter when:
- There are discrepancies in data HMRC receives from overseas tax authorities.
- HMRC note changes to your personal circumstances.
- third party information supplied to HMRC indicates inaccurate or incomplete reporting.
Common triggers for HMRC nudge letters are:
- Overseas income
- Rental income
- Online marketplace earnings
- Individuals named in the Pandora Papers
- Cryptoasset transactions
The Crypto Asset Reporting Framework (CARF), for tax compliance and Markets in Crypto Assets (MiCA) Law, which requires wallet providers to identify their customers, are expected to be adopted throughout 2024/25. Both encourage data to be shared across borders between different tax authorities, so we can expect more nudge letters and tax investigations from HMRC.
HMRCs first detailed guidance “The taxation of cryptoassets for individuals" arrived in December 2018 and was followed by the Cryptoassets Manual, but for many cryptocurrency holders, the world of taxation is still relatively new and unfamiliar. Receiving a 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 the difference between a HMRC nudge letter and HMRC enquiry letter?
A HMRC 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 so you shouldn't panic, but equally, it should not be ignored.
How should you 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, and 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.
Nudge letters don’t normally state HMRCs concern or even refer to a specific time frame, so it can be tricky to establish where they believe there is an issue, so getting help from a professional is advised. Our crypto tax calculator can help you generate accurate tax reports for your crypto transactions. If you believe you need to correct your tax return then seeking out a tax advisor is the most sensible approach - they can help you calculate what’s owed, navigate exemptions, tax rates and penalties for different tax years and help you disclose the information to HMRC appropriately.
If you realise that you need to address your tax position with HMRC, you may need to:
- Amend tax returns for previous tax years
- File a tax return for the first time
- Make a disclosure to HMRC.
If you believe you do not need to correct anything, we still recommend letting HMRC know - for your peace of mind and to avoid an enquiry later.
Do you need to file a tax return for your crypto?
In the UK, cryptocurrency is subject to capital gains tax and income tax. Whether you need to file a tax return depends on your activity, earnings from crypto and total annual income. You’ll need to file a tax return if your capital gains/losses are more than the annual exemption allowance. You’ll also need to consider any taxable income received from cryptoassets.
There is no smoke without fire, so if you have received a nudge letter from HMRC then it’s likely you have been participating in taxable activity and not reporting it correctly.
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.
Tips for crypto tax compliance
Stay up to date with crypto tax guidance
Guidance about crypto tax regulation is always evolving so make 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.
Be aware of tax deadlines 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. Before you can file your first tax return you also need to be registered with HMRC. The deadline for this is 5th October.
Maintain accurate records of your crypto transactions
Good record keeping 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 your own back up. Recap helps as it keeps your data consistent and in one place.
Stop burying your head in the sand about crypto tax!
Avoid falling for myths and misinformation about the taxation of crypto. Just because BitcoinBloke on Reddit says HMRC can’t trace your crypto, doesn’t mean you shouldn’t comply with tax laws! It's your responsibility to declare your taxes accurately. Remember that all crypto transactions are recorded on the blockchain, and technology is helping tax authorities trace activity. HMRC recognises the growth of cryptocurrency and its potential for hidden wealth and have made significant moves to address the tax gap recently.
Many crypto users are fearful of their potential tax liabilities. However, gaining clarity on the tax figure can be a massive relief, allowing you to plan accordingly and avoid undue stress. 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. Catching up with your dues as soon as possible is the best way to minimise any penalties.
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. It may not be as bad as you think!
Communicate with HMRC
While interacting with tax authorities may seem intimidating, HMRC is there to help. Crypto regulation is new and still a little 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!
Seek expert guidance
We highly recommended consulting with a specialist crypto accountant, who possesses the knowledge and experience to address your unique situation. You may find that you need to wander from your traditional accountant to 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.
Plan for a tax-friendly future
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. Our team is here to assist you with any questions you may have. While we're unable to offer tax advice, 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.
