Tax return pain awaits crypto investors

23 July 2021

Cryptocurrency investors are likely to be in for a shock when preparing their tax returns this year, as they may need to undertake complex calculations and disclose details of all their crypto transactions  to HMRC, even if no tax is due.      

Some statistics  

In its latest research, the Financial Conduct Authority (FCA) estimates that the number of individuals who own cryptocurrency in the UK has increased by 400,000 over the last year, rising from 1.9 million to 2.3 million people. Its research also suggests the profile of those investing is skewed towards men aged over 35 from the A or B social grades   (ie those with higher and intermediate managerial, administrative and professional occupations).

Diving deeper into the statistics, the FCA’s research indicates around 42 per cent   of owners are on incomes over £50,000 and those with the largest cryptocurrency holdings are seemingly individuals with incomes between £50,000 and £100,000. In this income bracket, over 12 per cent had cryptocurrency holdings worth over £10,000 and over 27 per cent had holdings worth over £1,000.

Tax return requirements  

Based on this picture of a typical cryptocurrency investor, it doesn’t feel like a significant leap to suggest that many of these individuals are likely to be among the 12.5 million in the UK who are required to submit a tax return.  

For those with a foot in both these camps, a potential administrative nightmare awaits them due to a little-known tax return rule  . Normally, when an individual sells an asset and generates a capital gain, there is no need to inform HMRC unless the total gains in the year exceed the individual’s capital gains tax (CGT) annual exempt amount (currently £12,300).

However, taxpayers are still required to complete the CGT pages of self-assessment tax returns and provide   details of disposals of assets, even if the gains fall within the annual exempt amount and no tax is due, if:

  • they are due to submit a tax return already; and 
  • the total proceeds they received on disposals during the year was more than four times the annual exemption (ie £49,200 for the 2020/21 tax year).

Inconvenient facts for some?  

That may seem quite a high threshold, but it’s important to remember that it is quite common for cryptocurrency owners to trade regularly in and out of different ‘coins’. The FCA research indicates at least 59 per cent   of cryptocurrency owners leave their investments on their cryptocurrency exchange; something that is common where owners want to be able to trade coins quickly in response to market volatility.  

For example, an individual with just £1,000 invested only needs to make one trade a week in order to be caught by this ‘disposal disclosure’ rule, although with such a frequency of transactions, they may also be at risk of being treated as trading rather than investing in cryptocurrency for tax purposes, with further tax consequences on which  advice should be sought . They may face great difficulty if they try to unravel HMRC’s rules themselves on how to disclose cryptocurrency gains as these can be painstakingly complex for taxpayers to work through. What might have seemed a bit of fun at the time could quickly bring on a tax-induced migraine. 

For more information please get in touch with Chris Etherington.