Cryptocurrency Tax Advice

Just because you can buy and sell tokens anonymously and make enormous gains does not mean that you should try to hide those crypto gains from HMRC.

At Cannon Chambers, we provide cryptocurrency tax advice and are contacted by crypto millionaires who have done very well but who have either not declared their crypto gains to HMRC or who have underdeclared their taxable gains and who are now regretting this and want to put matters right with HMRC. We also see crypto clients who are being investigated by HMRC for non-payment of crypto-related taxes, and we represent them in arriving at a settlement of their tax affairs or in defending them in criminal proceedings.

We are registered as an agent with HMRC and can submit the necessary HMRC crypto tax returns for you, help you pay the correct amount of tax on your crypto gains and crypto P2P tax and also consider any penalties that HMRC may wish to charge you. But now let’s look at some basic questions around tax on crypto.

Are cryptocurrency gains taxable?

Before we get started, there is one very important message – crypto is not a place to hide money from the tax authorities – just because your activities take place in largely decentralized anonymous trades does not mean that you don’t have to pay tax on the gains nor that HMRC will not be aware of your trades and identity.

Cannon Chambers has acted for clients who had wishfully decided that the few millions they earned from crypto were tax-free and they could buy a new house or a Ferrari, and HMRC would be none the wiser.

A few years went by, and they had thought they could forget about it, but their lives were turned upside down when the brown envelope from HMRC arrived enquiring as to why there was no trace of these millions on their tax return of a few years ago. Don’t be that guy!

Crypto gains are taxable, and this is because the UK authorities do not regard crypto in the same way as cash, which as an asset can be acquired and disposed of tax-free, but as having the same nature as stocks and shares so that any gains on selling or transfer are taxable disposals.

The UK tax that applies when you make a gain on crypto will normally be capital gains tax or CGT for short, but in certain cases, income tax can apply instead, depending upon the type of transaction concerned. For example, gains will be treated as liable to income tax if you are paid wages in crypto or if they are from staking, mining or air drops and in DeFi from staking, yield farming or lending.

Do you have to declare crypto assets to HRMC?

Merely owning crypto is not normally required to be reported to HMRC, but of course, when you make a gain from crypto by for example, selling it for cash, exchanging it for other cryptos, spending crypto on services or goods or gifting crypto, and you make a gain, then you must report that gain to HMRC in your tax return and pay the CGT or income tax, at the right time.

How much crypto is tax-free?

From 30th Oct 2024, if the gain is liable to CGT, the first £3,000 of total capital gains for the tax year are exempt, and then you have to pay 10% or 24% CGT depending upon how much taxable income you also have for the year.

If your crypto gains fall under income tax instead of CGT, then the rates vary between 20% and 45% on specific slices of income depending on the amount, and if your earnings are paid in crypto, national insurance contributions of up to 12% on a slice of your earnings may also be added as well.

Does HMRC know, or can they trace crypto wallets?

HMRC receives or can obtain information about users and their trades from all UK exchanges and will have the information you gave the exchange when you opened your wallet. HMRC also has agreements with the tax authorities in some other countries, which may allow them to access information about exchanges in those countries.

It is fair to say, however, that DeFi, or decentralized finance transactions involving peer-to-peer financial services on public blockchains, are harder for HMRC to track.

HMRC are increasingly concerned about unreported gains by UK residents and has issued two guides to telling HMRC about unpaid tax on crypto and also about how to pay tax on crypto.

Here are the links to these guides:

https://www.gov.uk/guidance/tell-hmrc-about-unpaid-tax-on-cryptoassets

https://www.gov.uk/guidance/pay-tax-on-cryptoassets

The fact that HMRC has issued this guidance suggests that they are gearing up for a big push on unpaid crypto taxes and are giving people a chance to come clean before they do so. If you have unreported crypto tax gains, then now would be a good time to take cryptocurrency tax advice from a professional and report the gains to HMRC.

Can HMRC seize cryptocurrency?

Yes, in principle, HMRC can seize cryptocurrency using their powers of search, seizure and forfeiture under the Proceeds of Crime Act 2002. Of course, the nature of crypto and wallets and DeFi may mean that it is difficult or impossible actually to get control of the assets concerned without cooperation, and so HMRC may have to resort to personal sanctions against the alleged crypto owner for failing to comply with orders to yield up the crypto such as asking a magistrate to levy fines or send threaten prison for non-compliance.

What happens if you’re under investigation for failing to declare cryptocurrency tax?

In this situation, you are potentially in serious trouble. I have advised a number of clients in this situation and it is not a pretty sight. What will happen is likely to depend on how you respond to HMRC when they open a check into you. It can be difficult emotionally to decide how best to respond initially because of the shock and worry caused by the letter you have received.

However, it is almost always sensible to cooperate, be transparent, and pay the tax due as this will ensure that the matter is dealt with as quickly as possible and with minimum interest and penalty costs. Of course, in rare cases, HMRC may have simply got it wrong and wrongly accused you of underpaying, and in these cases, you should defend yourself. 

In these situations, it is almost always sensible to seek cryptocurrency tax advice and representation from a professional adviser, but do make sure that they are properly qualified professionals with experience in crypto and tax investigations. A word of warning – there are a lot of pretty bogus firms out there on the internet with good search engine optimised websites designed to capture enquiries about HMRC crypto tax investigations and claiming to be “lawyers” with expertise in tax investigations but which are actually con merchants who are not actually UK qualified solicitors and rely on “lawyers” from obscure countries and whose main aim is to extract the maximum amount of fees from you and string out the process.

Having said that, I have to say that I have clients who have also encountered some UK solicitors and barristers, particularly in the criminal area, who are out to earn as much money from clients in distress as well, so do choose your adviser wisely.

If you receive a COP 9 letter from HMRC saying that they suspect you of tax fraud, then definitely take advice before you accept their offer not to prosecute you if you come clean and admit tax fraud – if you have any professional qualification or occupy a public office you risk ending your career and losing your job if you admit to committing tax fraud to HMRC as you will be obliged to report that to your professional body or institution with the almost inevitable consequences of informing them that you have admitted to tax fraud.

It’s also important, even if you are not suspected of fraud, to deal with HMRC carefully and, where it is realistic to do so, avoid conceding that your non-payment of tax was either deliberate or careless because deliberate or careless behaviour carries penalties.

In Summary

Crypto gives rise to many wide-ranging issues in relation to taxation, and in almost all areas, you can benefit from taking professional advice from a genuine UK-qualified barrister, solicitor or accountant with experience in cryptocurrency taxation.

As barristers Chamber with plenty of experience in advising clients in tax matters and representing them in disputes with HMRC and in cases before the tax tribunals and the courts, we can offer you advice and representation with HMRC.

Please contact our Clerk to arrange a discussion here