HMRC has a new reason to target bitcoin investors, says ANDREW OXLADE

It is unlikely that the Labor government was thinking about cryptocurrencies when it increased capital gains tax in the autumn budget. But I imagine revenue collectors are now eagerly watching the latest developments in bitcoin.

The resounding electoral victory of Donald Trump in the United States, and the anticipation thereof, have caused a notable increase in the price of the cryptocurrency.

a single bitcoin It is worth $92,000 at the time of writing, an increase of 47 percent in one month.

It is largely born out of the hope that the president-elect will relax restrictions on cryptocurrencies.

But this is a longer-term story. In two years, the value of bitcoin has grown nearly 430 percent. It is a notable capital gain.

Many Britons are feeling the benefits. Cryptocurrency ownership increased from 3 percent to 12 percent in five years, according to a Yougov indicator last measured in July.

I suppose many more people have joined the crowd since then. It is inevitable during a price “crash”.

In the survey, another 6 percent told Yougov they didn’t know. Perhaps some of the “don’t know” have purchased bitcoin substitutes, such as companies that invest in it, or perhaps they have traded apps that replicate the price.

Having only indirect ownership, they are unsure of calling themselves cryptocurrency owners.

HMRC may know your crypto

The point is that millions of people invest in cryptocurrencies and many of them will make huge profits. Meanwhile, the risk of owing capital gains taxes and their rates is increasing.

The capital gains tax rate increased in the Budget with immediate effect: from 10 per cent to 18 per cent for taxpayers on lower tax rates, and from 20 per cent to 24 per cent for those in higher tax bands.

This comes after a sequence of falls in the tax-free allowance, from £12,300 previously to £6,000 by 2023/24 and then to £3,000 by 2024/25.

Even before the tax changes and rising cryptocurrency prices, HMRC had identified an opportunity.

You know that many, many people are using crypto exchanges and even banking apps to benefit from cryptocurrency profits.

It appears to have data sharing agreements with companies that offer such services.

For example, it has been sending “nudge” letters to people that begin: “We are writing to you because our records show that you have disposed of crypto assets.”

‘However, you have not stated everything correctly. This means you may have to pay taxes.

It also launched a confessional cryptocurrency disclosure webpage last November, urging investors to clarify profits from previous years.

They would still have to pay the fines and interest owed.

Tax officials can look back 20 years if they believe someone deliberately and knowingly avoided paying.

From 2026, HMRC will receive more data from exchanges through the Crypto Asset Reporting Framework, an initiative led by the OECD.

It’s also worth noting that you consider some frequent transactions to be subject to income tax. However, for most cryptocurrency fans, CGT will be the challenge.

Under attack: Investors saw how much profit they can make without capital gains cut by former chancellor Jeremy Hunt… then Rachel Reeves raised tax rates

Do cryptocurrency investors even know they should pay taxes?

HMRC’s concern is that, according to its own 2022 research, only 34 per cent of cryptocurrency owners said they had a good understanding of CGT; the rest didn’t understand it or hadn’t even heard of it.

Expect more noise from HMRC as we approach the January 31 deadline for submitting self-assessment forms, where tax liabilities are listed and paid.

Of course, there are two common ways to avoid paying tax on the gains from your investments more generally: by purchasing them through a shares Isa or a Self-Invested Personal Pension, or Sipp.

In cryptography, this is not easy.

This is, in part, because the regulatory regime on this side of the Atlantic has so far not approved mutual funds for private savers.

In the United States, on the other hand, there are more than 25 exchange-traded funds, with billions of dollars, from companies such as Fidelity Investments and BlackRock.

Some UK investors have avoided this by investing in MicroStrategy, a US software and data company that has a stated strategy of buying bitcoins. It’s a stepped-up play on cryptocurrency: a riskier way to back a risky asset.

Others have chosen US-based Coinbase, a cryptocurrency buying and selling platform. Note that Coinbase stock just returned to its 2021 high.

Perhaps the lesson – and one that is difficult to accept when non-crypto investors feel FOMO (fear of missing out) – is to understand the risk others are taking by chasing bitcoin higher.

The warning in The Great Crash 1929 by John Kenneth Galbraith is useful. He noted the enduring belief of speculators that they can become rich without doing any work.

If that’s not enough, then consider the disputes with the taxman that many cryptocurrency speculators will face.

I risk incurring the ire of crypto fans by saying this, but as a retirement-focused investor who likes to sleep soundly, I’ll stick with the slow-get-rich approach of Isa and Sipp funds that can be safely hedged of the tax collector. .