From 1 January 2026, the Cryptoasset Reporting Framework (CARF) will require UK based cryptoasset service providers to collect certain information from their users and report it to HMRC.
This may come as unwelcome news to many crypto investors, for whom one of the attractions of cryptoasset investing is its decentralised nature. However, it is worth noting that HMRC has been receiving data from crypto exchanges since around 2021. For example, Coinbase, the UK’s largest registered digital asset company, already shares data with HMRC about customers with UK addresses and £5,000 worth of cryptoassets. What will change, however, is the scale of information shared.
The CARF is not just a UK-based policy, limited to domestic transactions. As part of the ongoing pursuit of global tax transparency, the UK is just one of more than 50 countries who have currently agreed to implement the exchange agreement. It will require cryptoasset service providers with a presence in that country to report information about users who appear to be tax residents in another country. The tax authorities of those jurisdictions will then mutually exchange all relevant information.
HMRC’s guidance states that providers will have to carry out sufficient due diligence of their users and that failure to do so could lead to them facing penalties of up to £300 per user for inaccurate, incomplete or unverified reports. It is therefore clear that cryptoasset service providers will need to take their reporting obligations very seriously.
How will this affect investors?
Under the CARF, service providers will collect information about all users, whether individuals or entities, such as companies, partnerships, trusts or charities and all types of cryptoasset transactions. This will no doubt lead to an increased administrative burden on service providers, who will need to collect a significant amount of data from their users, such as:
- name | date of birth | home address | country of residency
- national insurance number or unique taxpayer reference (if UK resident)
- tax identification number (if non-UK resident).
Then, for each transaction, providers must collect:
- value of the cryptoassets
- type of cryptoasset
- type of transaction
- number of units.
Clearly, once the CARF is implemented, HMRC is likely to receive vast amounts of data about cryptoasset investments, which it will use in its ongoing fight against tax evasion, targeting those who it believes have not reported their cryptoasset disposals correctly.
What to do next?
HMRC’s preferred approach when receiving information in this manner is to issue ‘nudge’ letters to taxpayers, which essentially ask the recipient to confirm that their tax affairs are up-to-date or to make a disclosure if any income or gains have not been reported. Whilst this may seem an informal process, it should not be taken lightly. Any such nudge letter issued by HMRC will have been triggered by the underlying information the department holds, and so the recipient is strongly advised to review their tax affairs in detail and to seek professional advice if there are any areas of doubt.
When tax reporting is found to be incomplete, either because incorrect tax returns have been submitted or tax returns have not been submitted at all, it is important to correct the position as soon as possible and to disclose any unreported income or gains. HMRC will always look more favourably upon an ‘unprompted’ disclosure, i.e., where a taxpayer approaches HMRC before it contacts them, with such a disclosure also being subject to lower potential financial penalties than a ‘prompted’ disclosure.
Where errors have been identified, HMRC will look to reclaim unpaid tax. The number of historical years that it can assess and the potential penalties that can be charged on any unpaid tax are based on the behaviour that led to the underlying errors. In the most serious cases, for example where there are deliberate omissions, HMRC can assess up to 20 years of historical income or gains, with penalties of up to 200% potentially being faced. The number of years to disclose and the potential penalty position can be complicated and so specialist professional advice should be sought before making any disclosure.
If you are a crypto investor, it is now more important than ever to ensure you are up to date with your tax reporting. The taxation of cryptocurrency is complex and many crypto trades (sales or swaps) that you may not have considered to be taxable events could require reporting on your tax return. These are not easy issues to navigate, so if you require further advice, or think you may have identified an error in your cryptoasset tax reporting, please contact a member of Crowe’s Tax Resolutions Team.
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