Cryptocurrency has become a popular investment, with around 10% of UK taxpayers estimated to own some. But the tax rules surrounding crypto are confusing, and many investors may not realize they owe taxes on their gains.

To tackle this, HMRC has started sending 'nudge letters' to those they believe may have underreported their crypto earnings. These letters are a gentle reminder that something might have been missed in your tax returns – and that it’s time to correct it.

Let’s break it down!

What's a ‘Nudge’ Letter?

HMRC sends these letters to individuals they think are 'at risk of non-compliance.'

They suspect you might have missed reporting your crypto gains or made a mistake. The letter gives you a heads-up that if you've got unpaid taxes on your crypto profits, you could owe not just the tax, but also interest and even penalties.

It isn’t guesswork. HMRC gets information directly from crypto platforms. Take it seriously, because the costs can add up quickly if you don’t act.

Why Are People Not Reporting Their Gains?

The tax rules for crypto assets can be tricky, but HMRC considers profits from buying and selling cryptocurrencies to fall under Capital Gains Tax (CGT).

In rare cases, if you are trading crypto like a business, it could count as income tax instead.

However, a lot of crypto investors simply don’t realise they have made a ‘disposal’ of their assets that counts for tax purposes.

For example:

The exchange of one cryptocurrency for another is subject to taxes.
Paying with cryptocurrency for products or services is taxable as well.

If you haven’t reported your crypto activity over the years, HMRC can go back up to 20 years to collect unpaid taxes, depending on why they were missed.

How to Fix Crypto Reporting Mistakes?

HMRC has a Crypto Asset Disclosure Facility, where crypto owners can report past mistakes. The nudge letters will encourage you to use it, but hold on!!! It might not be your best option. There are other routes that could better suit your situation:

1- Contractual Disclosure Facility (CDF)

If you have deliberately not paid taxes, this option protects you from prosecution as long as you fully disclose everything.

2- Worldwide Disclosure Facility (WDF)

If your crypto holdings are offshore, this is your go-to.

3- Digital Disclosure Service (DDS)

This is for UK-based holdings or if you owe other taxes, like inheritance or corporation tax.

The WDF and DDS options also give you more time, 90 days after notifying HMRC, to prepare your disclosure and arrange payment or a payment plan.

These methods might be a better fit if you have other tax issues to address. HMRC won’t be happy if you correct crypto mistakes but leave out other tax errors.

Got a Nudge Letter? Don’t Panic, Act Now!

Don't hesitate if HMRC has sent you one of these nudge letters on your cryptocurrency holdings! Our team can help you figure out the best and most affordable way to bring your taxes up to date.

At Crypto Accountants, we specialise in making sense of the complex crypto taxes. We will guide you through the best disclosure options and ensure you only pay what’s necessary, so you avoid unnecessary penalties and stress.

Don’t leave your crypto taxes to chance. Contact us today for a free consultation and let’s get your tax situation sorted!

Crypto Assets: Have You Received a Tax Nudge?