HM Revenue & Customs (HMRC), the UK's tax authority, is intensifying its crackdown on unpaid taxes from cryptocurrency gains, demonstrated by a significant increase in warning letters issued to suspected tax evaders. In the 2024-25 tax year, HMRC sent approximately 65,000 letters, more than double the 27,700 letters dispatched in the preceding year. These letters, often referred to as "nudge letters," serve as a warning to recipients that HMRC suspects they may have underreported or failed to pay the correct taxes on their crypto-asset profits.

This escalation reflects HMRC's growing focus on the crypto market as a potential source of tax revenue. With an increasing number of individuals investing in cryptocurrencies like Bitcoin and Ethereum, the tax authority is keen to ensure that gains from these assets are properly declared and taxed. As of 2022, it was estimated that nearly 5 million people in the UK owned some form of cryptocurrency.

HMRC views crypto assets as property, meaning that existing tax laws apply to crypto-related activities. Profits from selling, trading, or spending cryptocurrency are subject to Capital Gains Tax (CGT), with rates ranging from 18% to 24%. Income from activities like mining or staking may be subject to Income Tax, ranging from 0% to 45%. Taxpayers are obligated to report these gains and losses on their Self Assessment tax returns.

A "disposal" of cryptocurrency, which triggers a CGT event, includes selling crypto for traditional currency, trading one crypto for another, spending crypto on goods or services, and gifting crypto (except to a spouse or civil partner). Even transferring crypto between different platforms or wallets can be considered a disposal.

The "nudge letters" from HMRC indicate that the tax authority has gathered information suggesting the recipient may have undisclosed crypto profits. This information is often obtained from crypto exchanges. The letters serve as a reminder of the potential tax liabilities and encourage individuals to review their crypto activity and ensure their tax filings are accurate.

Failure to respond appropriately to these letters can lead to further investigation and potential penalties. HMRC has the power to assess additional tax for several years of unpaid tax, potentially going back as far as 20 years in some cases. The tax authority may also charge interest on late payments.

Experts advise anyone receiving a "nudge letter" to take it seriously and seek professional advice. The tax rules surrounding cryptocurrency can be complex, and it's easy for investors to be unaware of their obligations. It's crucial to accurately report all crypto-related income and gains to avoid potential penalties.

HMRC's increased scrutiny and the doubling of warning letters underscore the importance of understanding and complying with crypto tax regulations in the UK. Investors should maintain detailed records of all their crypto transactions and seek guidance from qualified tax professionals to ensure they meet their tax obligations.