Crypto and the reduction of the capital gains tax annual exempt amount

28 March 2023

In the 2022 autumn statement it was announced that the capital gains tax (CGT) annual exempt amount would fall from £12,300 to £6,000 in 2023/24 and to £3,000 in 2024/25. One of the reasons for having a CGT exemption is to prevent taxpayers and HMRC being mired down in compliance in relation to relatively small gains, which generate low levels of tax. In general, the reduction in the annual exempt amount seems likely to cause extra work at the lower end of the tax base and is likely to involve many people not currently in self-assessment. However, coupled with HMRC’s increased interest in cryptoassets (crypto), disposals of which will be required to be separately identified in tax returns from 6 April 2024, it seems worth considering the impact of these policy changes on the number of taxpayers who will be required to submit a tax return.

In a HMRC survey in 2022, 16% of taxpayers indicated that they were likely, or very likely to invest in crypto currencies in the near future. This may suggest that approximately 8m people will become involved in crypto in the near future. In our experience, many of these are likely to be at the younger end of the population, who are also less likely to currently be enrolled in self-assessment.

The same survey found that 8% of crypto investors had disposed of crypto resulting in gains of over £12,500 in the past year and hence would have been required to submit tax returns. A further 5% had gains over £5,000 and, under the rules prior to 6 April 2023, were not necessarily required to submit a tax return to disclose these crypto transactions, subject to their overall tax position.

If we project these figures onto the above estimate of future taxpayers involved in crypto investing, this may suggest that the reduction in the annual exempt amount might lead to around 400,000 additional taxpayers potentially needing to either include additional disclosures in their tax return or to join self-assessment.

One must question whether the additional resources HMRC will need to deal with an influx of extra tax returns due to the radically reduced annual exempt amount will bring in enough tax to make the change worthwhile.

It has been repeatedly seen that HMRC is struggling to maintain service levels on the number of tax returns it deals with currently. When one takes into account the additional gains on conventional transactions, as well as crypto gains, which will be reportable following the reduction in the annual exempt amount, this may exacerbate the issue.