Cryptoasset holders are the latest to be targeted by HMRC for reported failure to pay tax on profits as the Government seeks to reduce the tax gap and bolster public finances.

Tax non-compliance is estimated to be high in the cryptoasset sector, as tax legislation faces the challenge of keeping up with a rapidly evolving industry without a clear tax precedent.

Now HMRC is taking action, issuing ‘nudge letters’ to cryptoasset owners who it suspects have not paid the right amount of tax on their assets.

This follows the introduction of CARF – The Cryptoasset Reporting Framework – earlier in 2024, requiring cryptoasset firms to share customer data with HMRC when required.

Tax is a growing concern for cryptoasset holders – highlighting the importance of starting informed and taking early advice.

What do I need to report?

Profit on the sale of cryptoassets, or trading for another type of digital asset, are not currently considered income subject to Income Tax, rather as capital gains.

Any gain (profit) you make when selling (or ‘disposing of’) in cryptoassets will therefore be subject to Capital Gains Tax (CGT).

You’ll be taxed at a rate of:

• 10 per cent – on gains within the basic Income Tax band, if you pay the basic rate on your income
• 20 per cent – on gains that exceed the basic Income Tax band, if you pay the basic rate on your income or if you are a Higher Rate taxpayer.

Gains should be reported via a Self-Assessment form via an online platform. HMRC will then tell you how much CGT you need to pay, how to pay and when to do so.

If your total gains are less than £3,000 (including any other capital gains you have made in the financial year), then you do not have to report and pay CGT on cryptoassets.

If you invest in cryptoassets and your investment makes an income, this may be subject to Income Tax and National Insurance Contributions (NICs) – which you’ll need to report to HMRC via Self-Assessment and pay tax according to your Income Tax band.

Mitigating tax liabilities

It’s important that you pay the right amount of tax on your assets – which means ensuring you don’t pay more than you need to!

Remember that you get a £3,000 tax-free allowance each financial year on capital gains, so you may consider planning the disposal of cryptoassets before or after the start of a new financial year to maximise each year’s allowance.

You should also make sure that you’ve applied any allowable business expenses to your taxable profit when reporting investment income for Income Tax and NI.

It’s also important that you do not ignore any correspondence from HMRC regarding CGT on cryptoassets. Doing so could result in late payment penalties, which can be up to 100 per cent of the tax due – clearly a vast increase in your liability!

The best thing you can do is to seek early advice on the tax implications of your cryptoassets and plan ahead to optimise your tax plan.

Contact us for further advice on cryptoassets and capital gains tax.