As bitcoin surges past $82,000 for the first time today, up 123% from a year ago, investors in the crypto markets are being warned that if they decide to cash in or take some profits, "they need to watch out for a potential tax liability, or they could fall foul of HM Revenue and Customs".
That's the advice of James Carn, associate director in private client tax at Evelyn Partners as the sharp spikes in crypto markets coincide with a tighter capital gains tax environment for investors in the UK.
"HMRC has been closing in on crypto profits, where it estimates there are high rates of non-compliance, in terms of gains not being declared," says Carn.
This year the tax authority has already been sending 'nudge letters' to those it suspects of failing to pay the correct tax on their crypto gains.
These letters are intended to encourage people to comply with tax regulations or take specific actions related to their tax affairs, maybe to warn individuals that if there is additional tax to pay on previously undisclosed crypto gains, there may also be extra interest due or even penalties to pay of up to 100% of the tax due.
"The basic message is that, if you have sold crypto for a profit during the tax year, you may have to report it by filing a tax return and you may owe tax," says Carn, noting that this is more pertinent now that the CGT regime in the UK has become more restrictive.
At the autumn Budget two weeks ago, CGT rates were raised immediately from 10% to 18% for basic-rate taxpayers and 20% and 24% for higher and additional-rate taxpayers.
Exemptions are also much reduced, with investors in 2023 having a £12,300 allowance before any capital gains were were taxable in that tax year, but since this past April was was cut to £3,000.
Many crypto investors might not be aware that they should be declaring the sale to HMRC on a self-assessment tax return, says Carn.
"At the very least it might mean that many taxpayers who never usually have to bother with a tax return, as their tax affairs are dealt with through PAYE, must tackle self-assessment next year, when returns are due for the current 2024/25 tax year."
The tax treatment of crypto assets can get complex, but Paul Falvey, tax partner at BDO, says in simple terms the UK taxman views profits or losses made on buying and selling of exchange tokens as within the scope of CGT.
"Its guidance says that only in exceptional circumstances will HMRC accept that buying and selling of crypto amounts to a trade for tax purposes."
BDO has warned that this letter is targeted at those the tax authority knows have ‘disposed’ of crypto assets, including when people have exchanged one cryptocurrency for another or paid for a product or service using cryptocurrency.
Several years of unpaid tax may be payable and, depending on the reason why it is undisclosed so far, HMRC can have up to 20 years to assess additional tax, BDO said.
“To bring their tax position up to date, individuals may need to source reports from their financial advisers or online platforms. In certain circumstances, those affected would do well to seek specialist advice on the most appropriate disclosure facility to use," said Falvey.