Sarah Saunders

Written by: Sarah Sauders

Sarah Saunders

Personal Tax Manager

Investing in cryptocurrencies? Then watch out for capital gains tax changes

With the Budget fast approaching some of the possible capital gains tax (CGT) changes may have a strong effect on investors in cryptocurrencies. We consider the impact of a couple of projected changes. Will more people be drawn into the tax net, with more administration for little return?

Reducing the annual exemption

Many crypto investors currently make gains below the £12,300 CGT exemption and hence are not required to make tax returns unless their proceeds are high. If the exemption falls, more people will be drawn into making returns but, after deduction of the exemption, the taxable gains will be low, and many taxpayers may only stand to be taxed at 10%. However crypto gains can be complex to calculate, so people may choose to use an accountant, running up fees in excess of the tax due. Assessing and collecting this tax could well cost HMRC more than the tax payable as well.

For example, if Miss Crypto currently had gains of £8,000, this is covered by the annual exemption and she is a basic rate taxpayer dealt with via PAYE so her tax position is settled. 

If the annual exemption fell to £6,000, this would leave £2,000 of gains, taxable in this scenario at 10%, tax due of £200. She would need to prepare a return and HMRC would need to deal with this and collect the relevant tax.

The annual exemption is there to prevent HMRC and taxpayers having to deal with a relatively trivial amount of gains and reduce unnecessary administration costs. Pulling many more taxpayers into preparing returns seems a step backwards, and HMRC already has difficulty dealing with the volume of work it has.

Introducing different tax rates for short term gains

It has been suggested the government may introduce different tax rates for short-term and long-term gains, with short-term gains being charged at higher rates. Most people who invest in more conventional assets, like stocks and shares, tend to be long-term investors. Many people in cryptoassets however engage in switching between different currencies in response to movements and hence would be hit harder by a higher short term tax rate.

Whilst the change appears attractive for the government, the level of recordkeeping and complexities of matching share sales and purchases can make this an unattractive option as it pushes up administration levels without being likely to produce a change in investor behaviour.

The future

If CGT remains untouched in this Budget the fact remains the pressure for change is there. We believe that it is important that changes are:

  • carefully considered;
  • do not add further complexity to a complex system;
  • do not bring large numbers of smaller taxpayers into the tax net for trivial amounts of tax; and
  • do not create a large added burden for taxpayers and HMRC.

The unusual features of crypto investing make them the most vulnerable to the putative changes, but many smaller taxpayers could also be faced by extra administrative burdens of record keeping and return submission for little return for the government.

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