HMRC now regularly receives data from cryptocurrency exchanges and platforms, enabling it to focus more closely on crypto traders and establish a dedicated team to tackle tax avoidance. Nudge letters have already been issued, and formal investigations are expected to increase.

The question of how to tax cryptocurrency was settled some years ago (at least as it applies to the majority of individuals) and taxpayers failing to declare cryptocurrency transactions can no longer hide behind a lack of clarity regarding its taxation. An explanation of the way in which cryptocurrency is taxed can be found here, but to summarise, receiving cryptocurrency in exchange for doing something will generally be considered taxable income (falling subject to income tax) this includes mining and staking, whilst selling cryptocurrency will generally be considered a capital disposal (falling subject to capital gains tax).

Historically, it was very difficult for HMRC to trace individuals who had bought and sold cryptocurrency. However, over the last few years HMRC has increased its focus on crypto assets and has begun to use its third-party information powers to obtain details of individuals holding cryptocurrency from exchanges, operators of cryptocurrency ATMs and custodian wallet providers. In addition, it has also developed ways of analysing the public Blockchain to identify connected transactions and wallets.

Furthermore, banks and other financial institutions are obligated to report any suspicious activity through Suspicious Activity Reports. This would include transactions where there is a suspicion of money laundering due to the amounts involved, or any pattern in the transactions, or indeed the source of the funds.

Significant penalties can be applied to financial institutions that fail to make such reports, so, with cryptocurrency considered a high-risk area, many institutions may err on the side of making reports simply to ensure there cannot be any allegation of a failure to do so.

As a result, HMRC has significant amounts of information regarding cryptocurrency, and its use no longer allows people to remain as ‘under the radar’ as they may believe.

HMRC is issuing further nudge letters to individuals suspected of trading in, or otherwise receiving, cryptocurrency without having made a tax declaration; and HMRC has also begun opening enquiries into the affairs of taxpayers who ignore those nudge letters, or where significant sums may be involved.

If HMRC has opened an enquiry into your tax affairs, or you have received a nudge letter, and wish to discuss you situation with a specialist, you can reach a member of Buzzacott’s Tax Investigations team on – +44 (0)20 7710 3389.

The consequences for taxpayers can be serious. In addition to the assessment of unpaid tax (with interest) HMRC will impose penalties where the taxpayer failed to declare the cryptocurrency transactions through lack of care, or where they deliberately omitted the income or gains from their filings or deliberately failed to file tax returns at all.

In serious cases of tax evasion, HMRC could initiate criminal prosecutions and either freeze or seize cryptocurrency or other assets.

Crypto Asset Reporting Framework

HMRC’s focus on cryptocurrency, and its ability to obtain information regarding users is only going to increase as the Crypto Asset Reporting Framework comes into force. This framework has been agreed by the Organisation for Economic Co-operation and Development (OECD) and is designed to help prevent taxpayers using cryptocurrency to avoid the Common Reporting Standards.

From 1 January 2026, crypto asset service providers operating in signatory countries will be required to collect information regarding the activities and tax residency of users and submit that information to HMRC (or the tax authority in the country in which they operate). That information will then be shared with other tax authorities, with the aim of tackling tax avoidance and evasion across the world.

HMRC is, therefore, set to have even more information regarding users of cryptocurrency, and the amounts they have received or traded. As such, and given the serious penalties which can be applied, taxpayers who have not declared their cryptocurrency transactions, or believe they may have done so incorrectly, should look to make a disclosure as soon as possible.

Disclosing undeclared cryptocurrency transactions

Making a disclosure before HMRC contacts you will be looked upon favourably and will reduce the penalties HMRC can charge.

The facility under which a disclosure should be made will depend on the reason the transactions were not previously declared. If you knew you should be declaring the cryptocurrency transactions and chose not to do so, a disclosure using the Contractual Disclosure Facility (CDF) under Code of Practice 9 (COP9) would be the most appropriate, as this provides immunity from prosecution provided a full disclosure is made. Frequently asked questions regarding the COP9 process can be found here.

If instead you consider the errors to have been unintentional then a digital disclosure would be more appropriate.

Buzzacott’s specialist Tax Investigations team have extensive experience with both facilities and can advise you on the best option in your circumstances.

Case study

Mr X approached us after receiving a nudge letter from HMRC regarding undeclared cryptocurrency gains. Like many others, he had started buying and selling crypto before HMRC clarified its position on the tax treatment of such transactions. As a result, he hadn’t included the income on his earlier tax returns.

Naturally, he was concerned — unsure of the potential penalties, and anxious about how HMRC might respond. 

After HMRC’s guidance was published, he filed a return to include cryptocurrency transactions but needed to correct his historical tax position. We advised Mr X to make a digital disclosure and supported him throughout the process — calculating the tax due, interest, and potential penalties.

During our review, we also identified an error in the tax return he had filed, stemming from the complex ‘pooling’ rules that apply to the calculation of capital gains on cryptocurrency disposals. We, therefore, corrected this as part of the disclosure.

Due to the number of transactions, and the amounts involved, HMRC raised queries in relation to the content of the disclosure. However, we were able to limit HMRC’s requests for information to that which was strictly necessary; and, through careful and well-supported representations, we were able to persuade HMRC to exercise their discretion and allow losses that were technically out of time — reducing Mr X’s overall tax liability by more than £100,000.

Additionally, we successfully negotiated the suspension of £40,000 of penalties, further reducing the amount payable. While HMRC is not obliged to offer suspension, they may do so where appropriate representations are made, and certain conditions are agreed. Provided those conditions are met, the penalty does not become due for payment.

Finally, we were also able to agree payment by instalments, allowing Mr X to divide the total liability into manageable amounts, ameliorating the immediate financial impact on Mr X and bringing the matter to a more favourable conclusion.

Mr X went from feeling overwhelmed and uncertain to relieved and reassured, knowing his case was being handled thoroughly and professionally.

If you’ve received a nudge letter or are unsure about your crypto tax position, don’t wait — early action can make a big difference in both outcome and cost.