Cryptoasset Reporting Framework Assists HMRC Recover Tax From Trading Profits
Profits derived from cryptocurrency transactions involving, for example, Bitcoin and Ethereum have increased dramatically in recent years, creating significant wealth. The Government continues to target cases where the appropriate tax has not been paid on these gains.
The rapid expansion of cryptocurrency transactions has prompted HMRC to take steps to improve the efficiency and effectiveness of collecting the necessary data to understand their nature and recover all taxes properly payable on the profits arising from them. HMRC also seeks to assist taxpayers meet their obligations to declare all profits received.
From 1st January 2026, the Cryptoasset Reporting Framework (CARF) requires all UK based cryptoasset service providers to collect certain transactional information and report it to HMRC on an annual basis. This requirement significantly extends the previous arrangements whereby HMRC has, for several years, received data from crypto exchanges such as Coinbase concerning UK based customers who own cryptoassets valued at more than five thousand pounds.
However, CARF is not simply a UK policy covering domestic transactions. It is part of a global strategy incorporating more than fifty countries, all of which are committed to pursuing tax transparency. It requires cryptoasset service providers in every participating country to report information about users who appear to be tax residents of another participating country. This will facilitate tax authorities of those jurisdictions to mutually exchange relevant information with one another.
Service providers, under CARF, are required to conduct stipulated due diligence and, given that failure to comply will attract a penalty of up to three hundred pounds per user, it is clearly in their best interests to comply.
The vast amount of cryptoasset investments data that will be provided by CARF will assist HMRC in its ongoing efforts to tackle tax evasion by identifying those taxpayers it suspects of having generated such wealth whilst failing to pay the appropriate tax.
Nazaqat Maqsoom of KANGS outlines the manner in which both service providers and taxpayers will be affected by CARF.
Reporting Obligations of Service Providers
The Reporting Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulation 2025 (‘the Regulations’) requires service providers to undertake reporting and due diligence.
A service provider is any individual or entity, that as a business, provides a service effectuating exchange transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary to such exchange transactions or by making available a trading platform.
This definition includes cryptoasset exchanges, brokers and dealers, ATM operators and wallet providers who effectuate transactions.
Reporting
UK firms, falling within CARF, are required to collect and report detailed transaction and user data to HMRC starting from the 2026 calendar year. The first report is due between 1st January 2027 and 31st May 2027.
Reporting requirements include certain personal details identifying the individual and transaction summaries identifying the nature of the cryptoasset(s) traded, the number of transactions, gross proceeds etc.
Due diligence includes:
- collecting self-certificates from cryptoasset users,
- validating the content of the self-certificates and
- maintaining a clear audit trail of the due diligence process.
All data and submission records must be maintained for a minimum of six years.
Self -certificates
A self-certificate is an integral part of the process. It allows service providers to identify cryptoasset users whose activities have to be reported to HMRC. A cryptoasset user is an individual or entity being a customer of a service provider for the purpose of carrying out relevant transactions.
How Will CARF affect Investors?
As explained above, service providers are now required to collect information about all users, whether individuals or corporate entities, and all types of cryptoasset transactions, and to report that information to HMRC.
Any expectation that crypto transactions, and the profits arising from them, can be hidden from HMRC no longer exists. This compulsory systematic reporting provides HMRC with all the information it requires in order to raise assessments to tax.
Once HMRC receives its first full data set in 2027, it will be able to directly compare that information against every Self-Assessment return which has been filed for that period. HMRC anticipates that millions of pounds will be recovered from previously undeclared profits arising from cryptoassets transactions.
Accordingly, transactions conducted since January 2026 are already being captured and there is no opportunity for adjusting historic reporting. However, the period between now and 2027 provides the window for correcting historic gaps before automated cross-referencing commences.
How Will HMRC Regard Undeclared Tax?
In general, HMRC will look more favourably upon an ‘unprompted’ disclosure by a taxpayer of errors in their tax returns, rather than a disclosure made after they have contacted them regarding suspected tax evasion.
When tax reporting is found to be incomplete for whatever reason, it is important to correct the position as soon as possible and to disclose any unreported income or gains.
When HMRC decides to take action, its preferred approach is to issue a ‘nudge letter‘ which, essentially, asks 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.
In more severe cases, HMRC may open and pursue criminal investigations for offences including cheating the public revenue which carries a maximum sentence of life imprisonment, showing how seriously such matters are taken by HMRC and the Government.
How Can We Assist You?
The radical changes outlined above in the manner in which HMRC will receive data concerning all cryptocurrency transactions emphasise its determination to eliminate the possibility of profits arising from such transactions remaining undeclared.
Failure to engage with HMRC will have significant adverse consequences should you receive a ‘nudge letter’.
Our team of experienced solicitors will be able to advise and guide you through the process of HMRC litigation.
If you or your business becomes subject to any form of HMRC investigation, it is essential that you immediately seek experienced legal advice. The team at KANGS has extensive experience gained from advising and representing clients involved in HMRC disputes of every nature.
Taxpayers holding crypto assets should check their position to understand any potential liabilities and seek Legal advice.
If we can be of assistance, our team would be delighted to hear from you, simply contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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