Crypto currency gains won’t be forgotten by HMRC

Will Drysdale, Senior Reporter, Business & Accountancy Daily

HMRC is warning people holding crypto currency over long periods and eventually making a gain that they will be liable for tax on their profits.

Not only will taxpayers have to declare when they have sold tokens for a profit, but also when assets are exchanged for an alternative crypto currency, and tokens are used to purchase goods and services, even when they have been given away.

In future, self assessment tax return forms are going to include a dedicated area for reporting crypto gains, HMRC confirmed, while it has released a YouTube video explaining tax liability.

So self assessment tax returns will have to include the type of token, the date each has been bought or gifted, the number of tokens and their value in pounds.

HMRC advises crpto investors that they must keep copies of bank statements for the relevant periods. Full details of when the assets are sold will also need to be disclosed. HMRC can go back up to 20 years if an enquiry is launched.

It is important to note that crypto currency platforms do not collect capital gains tax, HMRC stressed, so everything must be declared directly to HMRC.

Additionally, if crypto has been mined by the taxpayer, then this has to be declared on a tax return as ‘other income’.

From next year, crypto platforms may have to disclose all transactions to HMRC, as now happens with online platforms such as eBay, Etsy and Vinted.

Last year there was a consultation on the implementation of global transparency rules which looked at the mechanics of how crypto platforms would share client data with HMRC from 2026.

HMRC also warned that digital wallet addresses should be kept as a permanent record in case a compliance check is ever carried out by HMRC.

Paying salaries in crypto

HMRC also warned about potential risks of being paid in cryptocurrency.

There are some scenarios where employers choose to pay their staff in cryptocurrency, and in most circumstances the employer should deduct income tax and National Insurance contributions (NICs) directly via PAYE.

However, where the employer does not do this, for example if a contractor is hired through an umbrella company, the individual taxpayer will be liable and HMRC stressed ‘it is your responsibility to check and make sure the correct tax is paid’.

Even if income tax has already been paid on these funds, if they are sold at a later date for a profit then this could be subject to capital gains tax (CGT) if the profit breaches the £1,000 trading and miscellaneous income threshold, which includes crypto.

HMRC stated: ‘You can get up to £1,000 allowance each tax year for trading and miscellaneous income. The income you earn from your cryptoassets will count towards this allowance. You must tell HMRC if your total miscellaneous income from all sources is between £1,000 and £2,500.’

If this income is over £2,500 then it will be necessary to register for self assessment.

Last August HMRC sent a batch of letters to crypto investors who they identified as having not declared their gains, as well as people that had been getting paid by their employer in crypto. HMRC also demanded a reply to the letter within 60 days.

Undeclared income from crypto assets from previous tax years can be declared through HMRC’s disclosure service but may end up incurring penalties and interest payments.

Danielle Ford, head of tax disputes and resolutions at HaysMac, explained: ‘A disposal is not only when a crypto asset is sold for fiat currency, but also when a crypto asset is given away under certain circumstances, used to buy goods or services, or purchased using another cryptoasset.

‘For example, if an individual bought Ethereum using Bitcoin, a disposal of Bitcoin would have been made and the gain on disposal would need to be calculated. Many are therefore likely to have a tax liability that they may not have been aware of at the time of the transaction.’