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UK's Tax Authority Targeting Crypto Investors

Last updated: 09 Sep 2024 11:00 Posted in:

The UK could be missing out on billions in tax revenue from crypto investors that is not being reported.

Recent research from Norway found that 88% of all Norwegian crypto investors fail to declare their holdings. While each tax-avoiding investor owed on average between £151 to £821, with 6% of Norway’s population holding crypto this could  add up to between £38m and £200m.

Researchers from Norway’s National Bureau of Economic Research were able to compile the figures as Norwegian tax returns are public.

In their report the bureau’s researchers said: “In other words, while a large number of crypto investors fail to declare their cryptos, each owes a modest amount of taxes. This finding suggests that tax enforcement strategies in the context of cryptos need to be well-targeted or cheap for the benefits to outweigh the costs.”

HMRC figures show that, like Norway, about 6% of the UK’s population invests in crypto, leading the researchers to conclude that between £500m and £2.5bn is potentially being lost to the public coffers.

HMRC believes that crypto investors’ non-compliance with the tax rules could “range from as high as 55% to 95%”.

The news comes amid concerns over the gap between what the UK government is owed and what it manages to collect, which the government has estimated at £40bn, or around 5% of all tax owed.

Recent data has revealed that HMRC suspects almost 800 of the UK’s 2,000 largest companies of underpaying tax, with the body currently investigating about half of the UK’s large businesses.

To combat crypto tax avoidance HMRC launched a campaign in August, sending ‘nudge letters’ to crypto investors it suspects have failed to pay the correct tax. The tax authority said it planned to send a second round of letters in September.

While HMRC’s campaign “is a crucial step towards ensuring transparency and fairness” in the crypto world, significant challenges still remain, said Hinesh Shah, forensic accountant at Pinsent Masons.

This is due to the decentralised nature of crypto, which provides anonymity, as well as the changing tax landscape and current lack of formalised international cooperation.

Meanwhile, 80% of crypto investors in the UK have invested less than £10,000 in the digital currencies, meaning that combined with minimal enforcement against crypto tax avoiders, investors have little reason to be concerned about any consequences.

Crypto investors are required to pay capital gains tax on any profits higher than £3,000, but in cases where HMRC considers the investments to be trading, they can also be subject to income tax and national insurance.

Shah added: “Simply making a voluntary disclosure platform available is not sufficient. Showing that enforcement action has been taken is a much stronger deterrent against non-compliance.”

He added that there needed to be stronger collaboration with international tax authorities and crypto exchanges on the issue.