HMRC’s campaign against cryptocurrencies is accelerating as it has now opened a new wave of tax investigations into crypto investors, says UHY Hacker Young, the national accounting firm.
Enquiry letters have now started to reach crypto investors, requesting information on how they funded their crypto investments, how they have determined what element of their cryptocurrency profits are subject to income tax and Capital Gains Tax 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 their crypto holdings.
HMRC has only given taxpayers one month to respond, causing stress and anxiety amongst those taxpayers.
The tax rules on cryptocurrencies can be difficult to interpret, for individuals who don’t 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 Capital Gains Tax, 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.
Commenting on this, UHY Hacker Young partner, Neela Chauhan, said that crypto investors should be very careful of incorrectly giving HMRC the false impression that they are traders.
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Chauhan said: “HMRC’s war on crypto tax avoidance has now stepped up another gear.
“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 4.97m people in the UK own some cryptocurrency as of 2022.