What is CARF and why does it matter for UK taxpayers?
“CARF” is HMRC’s Cryptoasset Reporting Framework and it forces UK crypto exchanges to register and send information to HMRC each year about the crypto transactions and tax residency of their users. Information about users who are not UK resident is also collected and HMRC sends that information to the tax authorities in other countries that have a CARF. HMRC also receives information from other countries about potential tax evasion and avoidance by persons connected with the UK who carry out crypto transactions. The intention is to give HMRC knowledge of crypto transactions carried out on the main crypto exchanges in order to cut down on tax evasion and avoidance through non-reporting of crypto gains.
Can HMRC use CARF to identify undeclared crypto gains?
Yes, under The Reporting Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulations 2025 HMRC receive information about crypto transactions from UK exchanges.
These regulations apply the rules and commentary set out in the OECD Crypto-Asset Reporting Framework, and require platforms with a UK connection that carry out exchanges between crypto and fiat currencies or between different crypto assets to carry out due diligence on users and let users know that information about their crypto transactions will be reported to HMRC.
Will CARF lead to more HMRC crypto tax investigations?
Yes, that is the intention. Data collection by exchanges began on 1 January 2026 and they must begin reporting that data to HMRC in May 2027 so it is incumbent on taxpayers to ensure that they report crypto gains to HMRC on their 2025/26 and subsequent tax returns or face an automatically generated HMRC investigation if the gains reported by the taxpayer do not match the data reported about them by exchanges to HMRC.
What is an HMRC crypto tax nudge letter?
An HMRC crypto tax nudge letter is sent by HMRC automatically to taxpayers who have been identified by HMRC’s computer as having made gains from crypto that have not been reported to HMRC by the taxpayer. The intention is that the letter will nudge the taxpayer to review their tax position and disclose voluntarily to HMRC and pay any unpaid tax on undeclared crypto transactions. Making a voluntary disclosure should normally avoid an investigation and minimise penalties.
Does receiving a nudge letter mean HMRC has evidence of undeclared crypto gains?
No, not at all. There will often be good reasons why tax has not been paid such as the taxpayer having changed tax residence so that the gains are no longer taxable. However, such nudge letters should not be ignored and however tedious it may be, it is better to engage with HMRC to resolve the matter properly. HMRC are like a Victorian steamroller and while they can move very slowly while producing a lot of steam, they eventually crush everything in their path unless you persuade them to stop.
Can HMRC investigate historic crypto transactions?
Yes, they can and will do so. They have up to 20 years.
What penalties can apply to undeclared crypto gains?
Serious penalties can apply if you fail to declare crypto gains to HMRC up to and including criminal prosecution and seizure of your crypto in the most egregious cases. More likely you can face late filing penaltiesif you do not file your tax return on time, a £300 penalty if you fail to supply your correct personal details to a crypto exchange, penalties for careless behaviour of 0% to 30% of the tax and then 20% to 100% of the tax (or up to 200% if there is an offshore dimension) if your failure has been deliberate, plus interest on the unpaid tax.
What should I do if I think I have undeclared crypto gains?
If you may have crypto gains that you have not told HMRC about then it is best to calculate your UK tax liability on those gains and then make a voluntary disclosure using HMRC’s Cryptoasset Disclosure Service. In this way you will reduce the penalties that HMRC may charge as well as setting your mind at rest.
If my crypto exchange is based overseas, can HMRC still obtain information about my transactions?
Yes, HMRC do receive reports from the tax authorities in other countries about crypto transactions. Under the OECD Crypto-Asset Reporting Framework and other arrangements, HMRC receives information from other countries about potential tax evasion and avoidance by persons connected with the UK who carry out crypto transactions.
Can HMRC obtain crypto transaction data from exchanges without CARF?
Yes, HMRC is not restricted to CARF and can use their information and inspection powers under Schedule 36 FA 2008. Additionally, most crypto exchanges and banks and other financial institutions both in the UK and overseas will voluntarily supply HMRC with information about crypto activity if requested to do so.
Can HMRC obtain data from cold wallets?
HMRC would require physical control of the wallet in order to extract the data on the wallet, however they are pretty good at using blockchain analytics software to track and trace wallet activity even if non-custodial wallets or a decentralised exchange such as Pancake or Uniswap is used and HMRC can often trace monies back to when they were last on a regulated crypto exchange.
HMRC crypto investigation or worried there might be?
If so, please contact Patrick Cannon here for legal advice about the options open to you.
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For professional and insurance reasons Patrick is unable to offer any advice until he has been formally instructed.
