HMRC targets crypto traders over unpaid tax

HMRC targets crypto traders over unpaid tax

Feb 19, 2024

HMRC’s campaign against cryptocurrencies is accelerating as more tax investigations into crypto investors are opened

In the latest clampdown on crypto traders, HMRC has sent letters to individuals informing them that they are under investigation for non-payment of tax, said UHY Hacker Young.

Enquiry letters have now started to reach crypto investors, requesting information on how they fund their crypto investments, how they determine what element of their cryptocurrency profits are subject to income tax and capital gains tax (CGT), and how they deduct losses from their tax bills.

Crypto investors who receive a letter are being asked to send documents to HMRC which record their cryptocurrency transactions and income earned from crypto holdings.

HMRC has only given taxpayers one month to respond, causing stress and anxiety among those taxpayers.

The tax rules on cryptocurrencies can be difficult to interpret, for individuals who do not have access to professional advice.

If an investor regularly buys and sells cryptocurrency, HMRC may class that individual as a trader. This would mean they would have to pay income tax instead of CGT, greatly increasing the size of the individual’s tax bill. However, there is no clear objective definition of what frequency of trading classifies a taxpayer as a trader.

Neela Chauhan, partner at UHY Hacker Young, said that crypto investors should be very careful of incorrectly giving HMRC the false impression that they are traders.

‘HMRC’s war on crypto tax avoidance has now stepped up another gear,’ said Chauhan.

‘Responding to an enquiry letter from HMRC can be a real minefield. Anyone who has received one of these letters needs to be extremely careful to be very accurate in how they respond. Getting it wrong can have hugely expensive consequences.

‘The tax rules for cryptocurrency are quite open to misinterpretation. This means that there is a chance that a taxpayer could accidentally leave HMRC with the impression that they’re trading professionally and open them up to income tax.

‘Anyone getting one of these letters really should take professional advice before responding.’

HMRC has stepped up its campaign against cryptocurrency investors amid the dramatic price rally across the crypto market over the past 12 months. Bitcoin has risen over 150% in the past year.

The tax authority is also keen to target crypto as a source of tax revenue as 4.9 million people in the UK own some cryptocurrency as of 2022, according to the Financial Conduct Authority.