Recent estimates suggest 4.2 million people in the UK now own some form of cryptocurrency, but public knowledge about the basics of cryptoassets remains limited. Many individuals who have benefited from rising value of crypto do not realise that they may owe tax on the gains. HMRC has begun to pursue individuals who have made gains by contacting exchange platforms and sending ‘nudge letters’ to relevant crypto investors.
Tax Director Lisa Vanderheide explains the tax implications of crypto gains and what to do if you need to pay.
What is cryptocurrency?
Cryptocurrency is a digital currency equivalent used for exchanges via a computer network, using encryption to manage distribution. Unlike pounds, dollars or other ‘real’ currency, it is not backed by a government or bank.
How can investors make money from cryptocurrency?
The most straightforward way to make money from crypto is to buy tokens at a certain exchange rate, wait for the value relative to ‘real’ money to rise and then sell the crypto assets for a profit. Because the value of crypto can rise and fall like any other currency, or stocks and shares, investors can gain or lose money.
Is cryptocurrency anonymous and do you need to pay tax on it?
Because it is possible to use crypto without releasing personal information, many people think it is fully anonymous. However, all crypto transactions are tracked and stored on a public network so anybody can see a user’s balance and transaction history. Exchanging ‘real’ currency for crypto will also require proof of identity.
Do you need to pay tax on cryptocurrency?
In the UK, HRMC considers gains made on crypto assets to be eligible for either capital gains tax or income tax. Cryptocurrency is treated as a form of investment, and regulated in a similar way to stocks and shares.
Can HMRC find crypto?
HMRC have used their legal powers to request information on customers with a UK address from online crypto asset platforms. They have focused on individuals who received more than £5,000 in crypto currency payments in either 2019 or 2020 as a starting point, but may look back further if they find individuals who are liable to pay tax.
HMRC have recently sent out thousands of ‘nudge letters’, targeting people who are either unaware they need to pay tax on crypto or are choosing to avoid tax. The letters encourage the recipient to disclose any unreported crypto asset gains to HMRC.
What should you do if you receive a nudge letter from HMRC?
For those who have received a letter from HMRC out of the blue, the prospect of being chased by the tax authorities is of course a scary one. There are various ways to disclose crypto asset gains to HMRC, including a new Digital Disclosure Service and amending previously submitted income tax returns.
Reaching out to a qualified advisor and then directly to HMRC is a sensible step. It is also worth seeking out advice if you are unsure of your crypto asset tax obligations.
Learn more: the LifeStyled Club Podcast
In conversation with the LifeStyled Club as part of their podcast series, Lisa provided an introduction to cryptocurrency and the tax implications for crypto investment vehicles.
The novelty and volatility of the crypto market makes it confusing to navigate for even seasoned professionals. Lisa notes in the podcast that cryptocurrency’s viability as a long-term investment remains largely untested, with some individuals making large ‘gains’ that they have then lost. Studying the market and taking financial advice is essential before investing.
Stewarts is not authorised under the Financial Services and Markets Act 2000. The above information does not constitute financial advice.
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