Need help calculating your tax liability? Crypto Tax Calculator automatically categorises your transactions, calculates your gains and losses using HMRC’s approved methods, and generates reports ready for your Self Assessment.
Create an account now, or learn more about crypto tax reporting requirements in the UK.
Need help calculating your crypto tax? Crypto Tax Calculator automatically categorises your transactions, calculates your gains and losses using HMRC’s approved methods, and generates reports ready for your Self Assessment.
Navigating an HMRC nudge letter can be complex and time-consuming. Crypto Tax Calculator can assist by:
Visit our homepage to explore how Crypto Tax Calculator can simplify your crypto tax reporting and help you maintain compliance with HMRC. Check out our UK crypto tax guide to learn more about your specific obligations and how to report them correctly.
Earnings from yield farming or lending crypto in DeFi platforms are taxed as income at the time they are received. However, depositing into and withdrawing from a liquidity pool may be treated as a disposal, which is a capital gains event.
Receiving cryptocurrency as payment for goods or services is treated as income at its market value when received. There are instances where the “value” of the work will be taxed instead of the value of the crypto received. Professional advice should be taken if you are unsure.
If you actively participate to receive an airdrop (e.g., completing tasks), the tokens are treated as income at their market value upon receipt.
Mining rewards are taxed as income. Those undertaking mining activities to an extent to which they are operating a business will be subject to additional tax obligations.
Cryptocurrency earned through staking is considered income at the market value at the time of receipt.
Adding liquidity: If adding assets to a liquidity pool results in a change of ownership or creates a new token (e.g., LP tokens), it may be considered a taxable disposal, with CGT applying to any gains. The answer to this can usually be found within the terms and conditions of the protocol.
Removing liquidity: Removing assets from a liquidity pool may also be a disposal, potentially triggering CGT based on the gain or loss relative to the cost basis.
Liquidity pool rewards are generally treated as taxable income upon receipt, subject to Income Tax.
Selling tokens received through an airdrop is a taxable disposal.
Tokens received without any action (eg, unsolicited distributions) are not taxed as income upon receipt. Instead, they are subject to Capital Gains Tax (CGT) when sold, with the cost basis typically being zero or the fair market value at the time of receipt if explicitly stated by HMRC.
Tokens earned through performing tasks (eg, completing activities) are taxed as income at the market value in GBP upon receipt. When sold, the gain or loss is subject to CGT, calculated using the market value at receipt as the cost basis.
Disposing of NFTs is treated similarly to crypto disposals, with gains subject to CGT.
Gifting crypto to someone triggers CGT based on the market value at the time of the gift. Gifting to registered charities or your spouse or civil partner does not trigger a taxable event. Here, we have often seen individuals gifting tokens to others but keeping them in their own wallet. If this is the case, it is very important to document the gift. Consider speaking to a tax advisor if you are uncertain of your position.
Spending cryptocurrency on goods or services is considered a disposal.
Exchanging one cryptocurrency for another (e.g., BTC for ETH) is treated as a disposal for tax purposes.
Any profit made when you sell crypto for fiat currency (e.g., GBP) is a taxable event.
In most cases of buying and selling cryptocurrency as a retail investor, you are participating in investing rather than trading. The two are treated differently for tax purposes.
The key difference between investing and trading – along with the different tax treatments, is how losses generated in the crypto-activity can be used.
In their guidance, HMRC have explicitly stated that they would expect it to be exceedingly rare that any crypto-activity constituting buying & selling crypto would be classified as “trading”.
If you are uncertain, speak to a tax advisor as there are always exceptions, including but not limited to, developing tokens and large scale mining.
You can be liable for both capital gains and income tax depending on the type of cryptocurrency transaction, and your individual circumstances. For example, you might need to pay capital gains on profits from buying and selling cryptocurrency, or pay income tax on interest earned when holding crypto.
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Received an HMRC nudge letter about your crypto? Ignoring it could mean penalties up to 200%. Here’s how to prevent that from happening.
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Receiving a ‘nudge letter’ from HM Revenue and Customs (HMRC) about your cryptocurrency activities can feel alarming. But don’t panic these letters are part of HMRC’s broader effort to ensure taxpayers understand and meet their tax obligations for crypto assets.
In this guide, we’ll explain what an HMRC crypto nudge letter is, why you might have received one, and the exact steps you should take to respond appropriately and maintain compliance with UK tax law. For a complete understanding of how crypto is taxed in the UK, read our comprehensive UK crypto tax guide.
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An HMRC crypto nudge letter is a formal communication sent to individuals who HMRC suspects may not have fully reported their cryptocurrency transactions for tax purposes.
These letters are educational in nature—their primary purpose is to remind taxpayers of their obligations and encourage voluntary compliance. Receiving one doesn’t automatically mean you’ve done something wrong, but it does indicate that HMRC has information suggesting you may need to review your tax affairs.
HMRC issues nudge letters as part of their compliance strategy to:
HMRC may have sent you a nudge letter for several reasons. The most common include:
HMRC collects information from multiple sources to identify individuals who may have undeclared crypto activities:
You’re more likely to receive a nudge letter if:
Important: Even if you believe your crypto activities don’t trigger any tax liability, HMRC may still send a nudge letter if their data suggests potential unreported activity.
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If you’ve received an HMRC crypto nudge letter, follow these steps promptly:
This is the most critical first step. Ignoring HMRC correspondence can lead to:
The nudge letter represents an opportunity to address any issues before they escalate.
Examine the letter thoroughly to understand:
Some nudge letters simply provide information and don’t require a direct response, while others may request specific actions within a set timeframe (often 30 or 60 days).
Compile a comprehensive record of all your cryptocurrency activities. You’ll need:
Use crypto tax software like Crypto Tax Calculator to automatically import and organise your transaction data from multiple exchanges and wallets. This can save hours of manual work and reduce errors.
Compare your transaction records with your previously filed Self Assessment tax returns to identify:
Be thorough in this review – it’s better to discover and address issues yourself than to have HMRC find them during an investigation.
Once you’ve identified any unreported transactions, calculate the correct tax liability:
This can be complex, especially if you have transactions across multiple years, exchanges, and crypto assets.
Before responding to the nudge letter, you need to understand which of your crypto activities may trigger tax obligations. HMRC treats cryptoassets as property, meaning most transactions are subject to either Capital Gains Tax (CGT) or Income Tax.
What about holding crypto? Simply holding crypto is not taxable. You only owe tax when you dispose of it or earn it as income.
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Given the complexities of crypto taxation, it’s highly advisable to consult with a tax professional who has specific experience with cryptocurrency. They can:
Look for accountants or tax advisors who specifically mention cryptocurrency or digital assets in their expertise.
If you’ve identified unreported crypto income or gains, making a voluntary disclosure to HMRC is crucial. Voluntary disclosure demonstrates good faith and typically results in significantly reduced penalties compared to HMRC discovering the discrepancies themselves.
How to make a voluntary disclosure:
Penalty reduction for voluntary disclosure:
The penalty for underpaid tax depends on the nature of the error and the quality of your disclosure:
Making a full, accurate, and prompt disclosure after receiving the nudge letter can help reduce penalties towards the lower end of the applicable range. The key is to be completely transparent and provide all necessary information voluntarily.
If your nudge letter requests a response:
If you don’t need to make a disclosure, you may still want to inform HMRC that you’ve reviewed your tax position and believe you’re compliant. This can help close the matter.
Failing to respond appropriately to an HMRC nudge letter can have serious consequences:
HMRC imposes penalties based on the nature of the non-compliance:
For example, if you owe £10,000 in unpaid crypto taxes due to a careless error, you could face an additional £3,000 in penalties. Deliberate concealment could result in £10,000 or more in penalties on top of the tax owed.
Interest accrues on any unpaid tax from the date it should have been paid. This interest compounds over time, significantly increasing the total amount owed.
Ignoring a nudge letter may trigger a full compliance investigation, which can:
In cases of serious, deliberate tax evasion, HMRC may pursue criminal prosecution, which can result in:
While criminal prosecution is rare and typically reserved for the most egregious cases, it remains a possibility for deliberate non-compliance.
The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Crypto Tax Calculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.
James Edwards has been active in the cryptocurrency industry for over 10 years. He is an avid user of DeFi and believes in the promise of a user-owned and operated web.
His expertise as a cryptocurrency journalist has seen him contribute to publications such as Nasdaq, CoinMarketCap and CoinTelegraph.
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