The cryptocurrency landscape has experienced rapid expansion and innovation in recent years. From widely traded exchange tokens like Bitcoin and Ethereum to more niche digital assets, such as NFTs (non-fungible tokens), and utility tokens, the scope and complexity of cryptocurrency activity have grown rapidly. As these financial transactions continue to evolve, understanding and adhering to tax regulations is essential to prevent any future complications.
To address this, HMRC launched the Cryptoasset Disclosure Facility in November 2023 – a targeted initiative designed to give taxpayers the opportunity to voluntarily disclose any unpaid taxes related to their cryptoasset activity. This facility forms part of HMRC’s broader effort to increase transparency and enforcement in the crypto space, while providing a structured, more lenient route for individuals to correct historic tax errors.
Whether you’re a casual trader, long-term investor, or simply someone experimenting with NFTs, it’s essential to understand when your crypto transactions may give rise to UK tax liabilities. Failing to properly declare taxable income or gains could result in costly penalties, especially if HMRC identifies the issue before you come forward.
This article explores the scope and significance of the Cryptoasset Disclosure Facility, outlines the steps involved in making a voluntary disclosure, and highlights why now is the time to take action. If you believe you may have underreported or overlooked your crypto-related tax liabilities, early voluntary disclosure is not only the most responsible step, but also likely the most cost-effective one.
Are you paying the right taxes on crypto?
Many cryptocurrency investors may not have historically fully complied with UK tax law. They have potentially overlooked the need to report income or gains from their cryptoasset transactions. To address this, HMRC launched a digital disclosure facility tailored for cryptoassets in November 2023.
This initiative enables individuals to voluntarily disclose any unpaid taxes related to their crypto holdings, reinforcing HMRC’s commitment to taxing crypto-related income and gains.
Understanding cryptoasset taxation
The tax rules surrounding cryptoassets can be complex, and it’s vital for individuals to know when a transaction might trigger tax obligations. Whether you’ve earned income from trading exchange tokens, profited from selling NFTs or conducted transactions with utility tokens, each activity could carry unique tax implications.
For example, disposing of a token for fiat currency is a more obvious example of a taxable transaction which will likely give rise to a capital gain or loss. Exchanging one token for another, even if no cash is realised, also constitutes a taxable transaction. In some cases staking crypto assets might also be considered a disposal for tax purposes.
Whether a transaction gives rise to capital gains tax or income tax will also depend on the nature of the transaction, and whether the individual or entity is involved in a crypto trade.
Given the evolving nature of the law and common misconceptions surrounding crypto transactions, it’s important to seek professional advice if you’re unsure whether you need to report anything.
Why is voluntary disclosure crucial?
If you suspect you owe tax on your cryptoassets, taking the initiative to disclose this voluntarily is crucial. Proactively coming forward demonstrates your commitment to compliance and can lead to more favourable outcomes than waiting for HMRC to uncover discrepancies.
It’s important to note that if HMRC identifies an issue before you disclose it yourself, you could face significantly higher penalties. By acting now, you can also accelerate seeking a resolution with HMRC.
Utilising the Cryptoasset Disclosure Facility allows individuals to provide HMRC with a comprehensive breakdown of their crypto activities, which includes reporting taxable transactions and any income tax or capital gains tax arising.
Guide to making a voluntary disclosure
1. Inform HMRC of your intent
Once you have ascertained there are historic tax liabilities to declare, the first step is to notify HMRC about your intention to make a voluntary disclosure. This is done through the official online portal, which is the same process used for other types of voluntary disclosures, as detailed here.
2. Preparing the disclosure
After notifying HMRC, you have 90 days to calculate any outstanding UK tax liabilities, along with any applicable interest or penalties. It’s recommended that a specialist disclosures adviser is engaged who has experience of submitting disclosure reports and computations to HMRC. To assist, you can gather relevant details of your crypto transactions, such as dates, amounts, and counterparties involved.
3. Submitting the disclosure
Once all the information is finalised, the disclosure is submitted online, and any disclosure letter, computations, or any supporting documentation, should be sent to HMRC alongside the submission.
4. Paying outstanding tax
If the disclosure includes an unpaid tax liability, it’s vital to settle the amount as soon as possible, typically alongside the submission. If needed, you should be able to negotiate a payment plan with HMRC.
Seek advice, if required
In the fast-moving world of cryptoassets, individuals involved in digital asset transactions must stay on top of their tax obligations. The Cryptoasset Disclosure Facility is an important tool for those looking to address any unintentional errors or omissions in their tax reporting. Early disclosure is key, as HMRC are periodically issuing nudge letters regarding crypto activity.
Staying proactive with your tax obligations and disclosing any oversights sooner rather than later is the best approach.
Whether you’ve engaged in crypto trading, NFT sales, or other digital asset transactions, it’s vital to understand that these activities can, and often do, create tax liabilities. With growing access to data from crypto platforms and international cooperation between tax authorities, the likelihood of HMRC identifying unreported activity is increasing.
Voluntary disclosure is not just a means to avoid penalties; it also provides peace of mind and demonstrates a proactive approach to tax compliance.
With the right support, crypto tax specialists can help you gather and calculate your cryptoasset tax position. Additionally, experts in tax disputes and disclosures can guide you through the entire process of bringing your tax affairs up to date and ensure you’re compliant whilst settling on the best available terms.
If you’re concerned about undisclosed tax liabilities from your crypto activities or if you need assistance with any other tax-related issues, don’t hesitate to reach out to Menzies’ Tax Disputes and Disclosures for advice and support.
Menzies is a leading UK business advisory and accountancy firm with international reach. We help accelerate your ambition, with a proven track record supporting both businesses and individuals to successfully reach their goals.
We focus on optimising our clients financially, operationally and strategically across Audit, Tax & Compliance, Accounts Advisory, Financial Planning and Transaction Services. Our 10-sector specialist teams work with Menzies experts in Strategic Business Advisory, International Expansion, Outsourced Services and Financial Planning, to create value and transition clients to the next stage in their journey.
Even as we scale, we continue to take a Partner-led approach to our client relationships. We use our Brighter Thinking methodology to empower clients with greater confidence and certainty in the face of increasing complexity.
Founded in 1912, Menzies is headquartered in London, with 600+ employees. Our clients are mid-size and large privately held corporates, non-profits, and individuals, across the UK and internationally via major market country-desks, and in 150 countries globally through Menzies membership of HLB, the global advisory and accounting network.
