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The UK could be missing out on billions in tax revenue from crypto investors that is currently going unreported.
As Norwegian tax returns are public, recent research from Norway was able to find that 88 per cent of all Norwegian crypto investors fail to declare their holdings.
While each tax-avoiding investor owed on average between £151 to £821, with six per cent of Norway’s population holding crypto, this adds up to a staggering amount: Between £38m and £200m.
“In other words, while a large number of crypto investors fail to declare their cryptos, each owes a modest amount of taxes,” said the researchers.
“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.”
Since both Norway and the UK have reported that about six per cent of their population invests in crypto, when scaled up for the UK’s population, this would be between £500m and £2.5bn of lost revenue for HMRC.
Of course, this isn’t an exact figure as we don’t know whether as many Brits are failing to report their investments on their taxes, but HMRC has said that non-compliance could “range from as high as 55 per cent to 95 per cent”.
In 2022, a freedom of information request from City A.M. revealed that the government had failed to even attempt to calculate the amount of tax avoidance from crypto investors.
The news comes amid concerns over the gap between what the UK government is owed and what it manages to collect, which has been estimated at £40bn, or around five per cent 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.
What could HMRC be doing to stop crypto tax avoiders?
To combat this high level of crypto tax avoidance, HMRC launched a new campaign this month, writing to crypto investors it suspected have failed to pay the correct tax.
The tax body said it planned to send a second round of letters next month.
While HMRC’s campaign “is a crucial step towards ensuring transparency and fairness” in the crypto world, significant challenges still remain, Hinesh Shah, forensic accountant at Pinsent Masons, told City A.M.
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 per cent 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.
To make further steps to combat the problem, Shah argued that HMRC had to begin demonstrating real-life case studies where crypto tax-avoiders have been pursued and enforced against.
“Simply making a voluntary disclosure platform available is not sufficient,” he said. “Showing that enforcement action has been taken is a much stronger deterrent against non-compliance.”
Secondly, Shah said that there needed to be stronger collaboration with international tax authorities and crypto exchanges on the issue, pointing to the ongoing rollout of the OECD’s Crypto-Asset Reporting Framework.
“CARF is a good initiative and will facilitate the sharing of information but until it is fully implemented, HMRC will always be on the back foot,” he added.