HMRC Cracks Down on Wealthy Crypto Investors Underpaying Tax

Capital Gains Tax cryptocurrency UK

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Rich crypto investors underpaid £428,000 in tax in 2020 – a 202% increase on the previous year, according to HM Revenue & Customs (HMRC).

The increase – up from £142,000 – shows that crypto adoption has surged and tax underpayment will only increase, says law firm Pinsent Masons, which highlighted the issue in a recent report.

The two main areas affected by tax underpayment are Capital Gains Tax (CGT) when investors realise gains, and income tax accrued by frequent crypto traders.

Steven Porter, partner at Pinsent Masons told International Adviser that HMRC is now actively looking for rich investors who are evading tax on crypto profits.

He added that HMRC was undoubtedly looking to increase the amount of information it gathers on cryptocurrency holdings while strengthening ties with overseas tax authorities to secure more data on foreign crypto exchanges.

Wealthy individuals are also thought to be responsible for an increase in other underpaid taxes as well, he said.

They include:

  • A 157% increase in underpaid Capital Gains Tax, from £293m in 2019 to £752m in 2020.
  • A 43% increase in underpaid Inheritance Tax (IHT), from £247m to £353m.

‘Nudge’ letters sent to cryptocurrency investors

According to Professional Adviser, HMRC is preparing to send ‘nudge’ letters to crypto holders to remind them of their tax liabilities.

The purpose of the letters is to ensure people understand their tax liabilities when it comes to crypto and pay the right amount.

Which taxes do I need to pay on my cryptocurrency?

It’s never been easier to buy Bitcoin – even PayPal offers it as standard – and crypto adoption is growing exponentially around the world.

As a result, an increasing number of investors will need to consider the tax position on their Bitcoin.

This applies to a number of different scenarios, such as selling crypto for a profit (Capital Gains Tax), income tax on your profits if you’re a regular trader, and money made from mining cryptocurrency.

Put simply, if you make any kind of profit from crypto-related activities you’ll need to assume there’s a potential tax liability in the same way as if you’re earning fiat income.

Bitcoin Tax implications
HMRC is encouraging crypto investors to check the tax they owe.

Do I need to pay Capital Gains Tax (CGT) on my Crypto?

Yes. Profits on any crypto – whether mainstream coins like Bitcoin or Ethereum, or altcoins such as Dogecoin or Shiba Inu – are all potentially taxable.

You get an annual tax-free allowance, and you can also deduct the original cost of the asset when making your calculation.

There are various completely legal ways to reduce or avoid some of the Capital Gains Tax on your crypto profits, such as doubling your annual allowance by transferring crypto to your spouse, or even deliberately selling some of your crypto at a loss.

Do I need to pay Inheritance Tax on my Crypto?

If you’re wondering whether you need to pay Inheritance Tax (IHT) on your Bitcoin, Ethereum or other cryptocurrency holdings then again, the answer is yes.

Cryptoassets are classed as property and will need to be included in an estate for Inheritance Tax (IHT) purposes on the death of the holder.

However, like Capital Gains Tax, there are a number of legal ways to reduce or avoid paying Capital Gains Tax on your Bitcoin and cryptocurrency assets.

Is it worth hiring a specialist accountant to do my crypto taxes?

Because of the complexity surrounding UK tax laws, it’s always worth considering employing the services of a professional if you’re unsure about where you stand, and the same applies to cryptocurrency.

If you’re crypto activities are straight forward you may be able to muddle through yourself by filling in a Self Assessment tax return.

However, for anything more complex you should always consider an accountant or tax expert to ensure you don’t fall foul of the law.

There are now numerous firms who specialist in cryptocurrency accounting, with some offering financial advice as well.

Related post: Do I need an accountant or financial adviser to help with my cryptocurrency?

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Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice.

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