Crypto Exchanges Face Increased Risk in the UK for Failing to Prevent Tax Evasion by Investors
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Loading... - Anneli Manurmi
- 22 Jan 2025
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As the UK government prepares to implement new tax and fraud legislation, crypto exchanges and digital asset platforms are facing heightened risks associated with compliance, particularly regarding tax evasion by investors. Starting January 1, 2026, new reporting rules will introduce significant responsibilities for these firms, including the potential for corporate criminal prosecution if they fail to prevent tax evasion.
The HM Revenue and Customs (HMRC) has been increasingly vigilant regarding the taxation of cryptoassets. Although UK tax legislation does not specifically address cryptoassets, the rapid rise in their popularity prompted HMRC to publish a dedicated Cryptoassets Manual in March 2021. This manual outlines how general UK tax principles apply to cryptoassets, including capital gains tax on disposals and income tax on earnings from mining, staking, or airdrops.
Despite this guidance, many investors remain unaware of their tax obligations, leading to significant uncertainty and potential non-compliance. HMRC has expressed concern over the scale of under-declared taxes among UK taxpayers involved in crypto investments.
In response to rising non-compliance, HMRC has sent thousands of "nudge letters" to crypto investors, encouraging them to disclose any under-declared tax. In November 2023, HMRC launched a voluntary disclosure facility specifically for cryptoassets, and the standard Self-Assessment tax return was amended to require taxpayers to separately identify crypto-related amounts.
Given the challenges in tracing crypto transactions, HMRC relies on data from crypto exchanges to monitor compliance. In 2019, several exchanges acknowledged HMRC's requests for user and transaction data, but enforcement remains complicated, especially for exchanges based outside the UK.
To enhance compliance, the UK government is set to implement the Organisation for Economic Co-operation and Development's (OECD) Crypto-Asset Reporting Framework (CARF). This framework imposes a new reporting burden on Reporting Cryptoasset Services Providers (RCASPs), which include any entities facilitating cryptoasset exchanges for customers.
Under CARF, RCASPs will be required to collect and verify user details and transaction information, reporting this data to HMRC. The goal is to facilitate information sharing between jurisdictions, enabling local tax authorities to target non-compliance effectively.
UK-based RCASPs must begin collecting the required information starting January 1, 2026, with reporting to HMRC for the 2026 calendar year due by May 31, 2027. This reporting will encompass both UK and non-UK resident investors. Failure to comply with these regulations could result in significant financial penalties, which may accumulate rapidly.
A critical concern for crypto exchanges is the potential for corporate criminal liability under the Criminal Finances Act 2017 (CFA). If CARF reports reveal widespread non-compliance among UK crypto investors, HMRC may choose to pursue the relevant exchanges rather than individual taxpayers. This approach aligns with the Labour Party's broader plans for tax compliance, focusing HMRC resources on maximizing returns.
Under the CFA, HMRC can hold companies accountable if they fail to prevent an "associated person" from facilitating tax evasion. This includes employees, agents, or third parties acting on behalf of the company. Notably, non-UK exchanges could also fall under the scope of these regulations.
Despite the CFA's introduction in 2017, many businesses, including crypto exchanges, have yet to implement adequate compliance procedures. Off-the-shelf solutions are often insufficient given the complexities of tax obligations related to crypto investments. Following the Financial Conduct Authority's (FCA) Crypto Roadmap published in December 2024, firms must prepare for the compliance culture that the new tax and fraud legislation will impose.
As the landscape evolves, the risk of a CFA conviction may increase, particularly under a Labour government, with additional fraud prevention legislation set to take effect in September 2025.
The impending changes in UK tax legislation present significant challenges for crypto exchanges and digital asset platforms. As the government intensifies its focus on compliance and tax evasion prevention, firms must proactively adapt their practices to mitigate risks and ensure they meet the new regulatory requirements. The successful navigation of this evolving landscape will be crucial for the sustainability and integrity of the crypto industry in the UK.
