The U.K. is looking for cryptocurrency traders who made gains during the two-year crypto boom and didn’t pay their taxes.

But it may not be too late to avoid hefty penalties if traders disclose their gains without being prompted, tax advisers say.

HMRC is seeking data for the period April 2017 to April 2019, during the height of the market, when cryptocurrency traders made enormous profits.

The agency recently sent requests to exchanges asking for names of clients who live in the U.K., as well as the date and value transferred either in fiat or cryptocurrency for that period, according to Peter Ivanov, a spokesman at the CEX.IO exchange.

The government push for access to information held by exchanges is the first hint of a crackdown on traders who didn’t pay taxes on their gains.

“HMRC regularly gathers data from a range of information sources using powers provided by Parliament. Data collected by HMRC is used to improve the integrity of the tax system and to identify those that have failed to declare their gains,” a spokesperson for the agency said Aug. 12.

Some traders made significant gains in 2017 when the price of Bitcoin, one of the most popular cryptocurrencies, grew from roughly $1,000 to $20,000 a token.

“Many investors believe the misnomers that you don’t have to report and that they can’t touch you, but that’s not the case, especially if you understand blockchain as a technology,” said Shukry Haleemdeen, director of MyCryptoTax, a cryptocurrency tax advising firm based in the U.K.

Stiff Penalties

Under HMRC rules, taxpayers who fail to disclose their gain could face a 20% capital gains tax plus any interest and penalties of up to 200% of any tax due. Those found to have evaded the tax could also face criminal charges and jail terms.

HMRC published guidance on cryptocurrencies in December 2018 stating that in most circumstances it considers the disposal of cryptocurrency assets as taxable if there has been a gain.

Taxpayers who wish to disclose information that they haven’t included in their self-assessed tax return can use the Digital Disclosure Service (DDS), HMRC said. The service allows taxpayers to make unprompted disclosures in exchange for reduced or no penalties.

Taxpayers shouldn’t wait for the outcome of the tax office probe and should act now to ensure that they have paid what they owe, or face steep penalties, practitioners said.

“I think the revenue will have very little sympathy with people who are not compliant and they have made it clear in their December guidance,” said Geraint Jones, a partner and private client tax adviser at accounting firm Berg Kaprow Lewis LLP.

“With only 20% capital gains it doesn’t really make sense to run the gauntlet. Taxpayers should pay the 20% and late penalties and enjoy their gains,” he added.

Difficult Calculations

“The thing that could really bite some of these traders is if they haven’t recorded any paper gains they made when exchanging one cryptocurrency to another. The data being given by the exchange could show this,” said Alon Muroch, CEO of Blox.io, a software company that helps individuals calculate taxes incurred from crypto trading.

The government applies higher penalties to taxpayers it deems “careless,” who include those who don’t keep accurate records. Tax advisers recommend that investors collect and keep records of any crypto asset transactions if they wish to avoid the penalties.

Many traders often shave off profits to invest in new or different cryptocurrencies, said Haleemdeen.

“Often these traders take any substantial profits and reinvest them in new crypto assets hoping to replicate or grow the way they did with their initial investment and don’t realize the exchange is taxable,” he said.

The U.K. is just the latest of a number of countries that have gone after exchanges in their quest to tax cryptocurrency traders. The U.S. recently sent 10,000 cryptocurrency traders letters warning them to disclose any undeclared taxes.

HMRC’s advance notice ’to exchanges comes as no surprise,” said Iqbal V. Gandham, U.K. managing director at eToro. He noted that crypto traders in Brazil must also report transactions to the country’s National Treasury.

Exchanges Respond

Crypto exchanges are carefully analyzing HMRC’s request.

“Our legal, compliance and technical teams will analyze the inquiry according to the obligations that CEX.IO has within existing regulations. Such analysis and evaluation may take some time, as regulatory obligations are very sensitive in regards to the customers’ personal data,” Ivanov said.

“People who cashed out at the peak, which was around about December 2017 should have disclosed those gains and paid their taxes to the revenue,” Jones said.

In some cases the exchanges may not even have the taxpayer information needed for a tax disclosure, Sharon Yip, founder of Crypto Tax Advisors LLC.

“Relying on exchanges is also a dangerous game. Some only track a few months of transactions, while some shut down completely, leaving investors with no historical records of their transactions. This makes calculating profit and loss almost impossible, and could even lead to legal repercussions,” she said.