UK Sending “Nudge” Letters to Its Crypto Investors

Her Majesty’s Revenue and Customs (HMRC) is preparing to send “nudge” letters to crypto investors in the UK.

The letters aren’t indicative of a recipient's fault. Rather, they’re intended to encourage investors to make sure they’ve paid the correct amount of taxes on their crypto transactions.

This new action isn’t the first time that HMRC has taken an avid interest in digital assets. In Summer 2019, they sought data for a two-year period—April 2017 to April 2019—by asking UK-based exchanges to disclose the names of their UK clients in addition to the dates and amounts of their transactions.

The UK has established stringent penalties for any tax evasion of crypto gains. Taxpayers could face a 20% capital gains tax, up to 200% of any interest or penalties due, or even jail time.

Any gains made from crypto transactions in the UK are subject to capital gains tax (CGT).

Gains and losses are calculated by subtracting the cost basis, or the purchase price of the asset, from the fair market value at the time of disposal to determine the gain or loss.

Multiple transactions are averaged out using the shared pooled accounting method; the cost of different transactions of the same asset are averaged together to determine an average cost basis (ACB).

UK crypto investors are also subject to the Same Day Rule and the Bed & Breakfast Rule, also known as the 30-Day Rule, in order to prevent tax avoidance on wash sales—a situation where an investor would sell to claim a capital loss, and then shortly thereafter repurchase the asset at a lower price.

• The Same Day Rule means all shares of an asset acquired on the same day are treated as one transaction.

• The Bed & Breakfast Rule means if the same asset is bought and sold within 30 days, the original sale price—and not the repurchase price—will be taken into account when calculating the gain.

It’s important to note, US investors currently have a very different set of circumstances in terms of their crypto transactions and the US Wash Sale Rule.

The “nudge” letters indicate that HMRC’s attention to the crypto space hasn’t waned and only continues to grow. A spokesperson for the HMRC told the International Advisor the objective is to “educate customers.” Analysts and economists speculate that HMRC suspects hidden wealth earned through cryptocurrency transactions in the UK.

For more information on UK guidance for crypto transactions, and the various tax consequences, please see the HMRC’s Cryptoassets Manual.