Crypto exchanges face increased risk in UK for failing to prevent tax evasion by investors

New reporting rules are expected to come into force in the UK from 1 January 2026 which will introduce additional risks for digital asset platforms and crypto exchanges including corporate criminal prosecution if they fail to prevent tax evasion by their investors.

HMRC's crypto focus

Although UK tax legislation does not deal specifically with the taxation of cryptoassets, their novelty and the rapid increase in their popularity led HMRC, in March 2021, to publish its dedicated Cryptoassets Manual setting out how the general principles of UK tax rules should apply to cryptoassets.

Broadly, capital gains tax can arise when investors dispose of their cryptoassets. However, many investors are not aware that this is not limited to scenarios where assets are liquidated into fiat but can apply where tokens are exchanged for different types of token or even where they are given away.   Furthermore, income tax might apply to cryptoassets derived through mining, staking, or even airdrops if done in the course of trade.

Given the nuances around when such taxes might apply and the potential for deliberate non-compliance, significant uncertainty for investors remains almost four years on from the publication of the manual – and HMRC is increasingly concerned about the scale of non-compliance by UK taxpayers.

Invitations to disclose

Recently, HMRC has sent thousands of "nudge letters" to UK taxpayers identified as cryptoassets investors, inviting them to disclose under-declared tax.

In November 2023, HMRC launched a voluntary disclosure facility specifically in respect of cryptoassets. The standard Self-Assessment tax return was amended in April 2024 to force taxpayers to separately identify amounts relating to cryptoassets.

Transactions in cryptoassets involving UK taxpayers are not easily traceable by traditional means and HMRC's current information is reliant on other sources, including cryptoasset platforms. In 2019, several exchanges publicly acknowledged HMRC had requested data about their users and transactions.

HMRC has statutory powers to compel exchanges to share data in some cases, but there will be issues around enforcement, particularly if those exchanges are based in other jurisdictions. In practice, certain exchanges may also only retain relevant records for a short period.

Implementing CARF

To address these challenges, the UK government has committed to implementing the Organisation for Economic Co-operation and Development's Crypto-Asset Reporting Framework (CARF), which creates a significant new reporting burden for "reporting cryptoasset services providers (RCASPs). These are essentially any entities that provide services effecting exchanges of cryptoassets for or on behalf of customers.

Under the framework, RCASPs will be required to collect and verify details on cryptoassets users and transactions; and make related reports to the relevant tax authority.

The intention is that the information obtained will be shared between jurisdictions to allow local tax authorities to target non-compliance.

2026 countdown

UK-based RCASPs will need to begin collecting the required information from 1 January 2026, with reporting to HMRC for the 2026 calendar year expected by 31 May 2027. Reporting will cover both UK and non-UK resident investors. HMRC will then receive information from UK-resident investors operating on overseas crypto exchanges through international exchange of information under CARF in due course.

Failure to comply will lead to financial penalties, with some being charged on a daily basis or per individual failure meaning the amounts could ramp up very quickly.

However, the more daunting issue for these bodies should be what HMRC might be expected to do when presented with an unprecedented amount of information on crypto investors.

Corporate criminal liability

If CARF reports reveal potentially hundreds or even thousands of deliberately non-compliant UK crypto investors, HMRC could decide to pursue the relevant crypto exchanges rather than investigate taxpayers on an individual basis. That will be more efficient for HMRC and would be consistent with Labour's wider plans on tax compliance, which emphasise that HMRC resource should be strategically focused to maximise returns.

Under the Criminal Finances Act 2017 (CFA), HMRC already has legislation at its disposal to pursue corporates if they fail to prevent an "associated person" from facilitating tax evasion by a third party. For these purposes, associated persons include an employee, agent or even a third party who is performing services for or on behalf of the company.

The CFA offences can apply to a body corporate or partnership, wherever incorporated and irrespective of tax residence. Non-UK exchanges are therefore potentially within the scope of these rules. If the CFA offences do apply, a corporate's principal defence is to have in place reasonable prevention procedures.

Osborne Clarke comment

Despite the CFA offences being introduced in September 2017, in our experience many businesses still do not have proper procedures in place. For crypto exchanges, any marketed off-the-shelf procedures will be invariably inadequate given the potential for investors to fail to properly pay tax on their profits or gains received through investments with crypto exchanges (as reflected in HMRC's huge focus in this area).

Following the publication of the FCA's Crypto Roadmap in December 2024, the industry's eyes have been focused on the future regulation of digital assets and digital asset platforms. However, firms need to ensure they are prepared for the wider compliance culture that tax and fraud legislation will impose upon them – a culture the FCA will expect platforms to have already considered when making applications for authorisation. The prospects of a first CFA conviction could be much higher under a Labour government and a further failure to prevent fraud offence legislation is coming into force in September 2025.

If you have any questions about the issues raised in this Insight, please contact our experts.