You might be wondering why HM Revenue & Customs (HMRC) has written to you about cryptocurrency and capital gains tax. With cryptocurrency increasingly becoming mainstream, HMRC has been issuing speculative letters to taxpayers, warning them of the potential capital gains tax implications of disposing of cryptocurrency.
The letters give examples of when a disposal take place: an example can be found here. HMRC’s ‘One-to-Many’ campaign letters deliver standard messages to multiple taxpayers at the same time.
The intention is to educate a wide pool of relevant people about a topic, but letters are also sometimes used as prompts to taxpayers to make a disclosure.
What does the letter say?
The letter states there are three main instances when a taxable gain may arise:
- Trading cryptocurrency – for example selling Bitcoin for a higher price than you purchased it for.
- Swapping one cryptocurrency for another – for example using Bitcoin to purchase Ethereum.
- Spending cryptocurrency – for example using Bitcoin to purchase a pizza.
All three of the above are examples of cryptocurrency disposals. The first is a traditional disposal. It is the second and third instances that HMRC want to raise awareness about in particular. In both instances, it is deemed that Bitcoin is being sold at the point the transaction is made and in return, Ethereum or a pizza is being received (in our example, at least). The usual capital gains rules would apply in each instance. An additional step in the second instance is that, not only has a disposal of Bitcoin taken place, but the purchase of Ethereum also takes place.
How does HMRC know which taxpayers to contact?
HMRC has received information from cryptocurrency exchanges to determine which taxpayers to write to. However, the campaign is by no means a ‘crackdown’ and the letters are largely being issued to educate people about potential capital gains tax implications of disposing of cryptocurrency.
Do I need to pay capital gains tax on my cryptocurrency?
If you do receive a letter, it doesn’t necessarily mean you owe capital gains tax, but you should consider whether you need to report any gains. As a reminder, the annual exempt amount for capital gains is £12,300. If you have realised net gains (ie total gains minus total losses) less than this amount from all sources of capital gains (including cryptocurrencies) in a tax year, then you don’t owe tax and will not need to register for self-assessment.
If you are already registered for self-assessment and your proceeds are more than £49,200, but gains are below the annual exempt amount, then you will still need to report the gain.
What are the penalties for getting it wrong?
If you don’t meet a reporting requirement following the receipt of a letter, HMRC has advised that prompted disclosure penalties will not necessarily apply. However, the fact the letter has been received will be taken into consideration when deciding whether a penalty should be levied and the severity of it.
Should you have any queries regarding any issues raised here, please get in touch with your usual Saffery contact, or speak to Robert Mace, Partner.