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 income collectors are now eagerly watching the latest developments in Bitcoin.

Donald Trump’s resounding election victory in the US, and the prospect of it, have led to a remarkable increase in the price of the cryptocurrency.

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

It was largely born out of hopes that the president-elect will ease restrictions on cryptocurrencies.

But this is a longer-term story. In two years, Bitcoin’s value has grown by almost 430 percent. It is a remarkable capital gain.

Many British people are feeling the benefits. Crypto ownership has risen from 3 percent to 12 percent in five years, according to a Yougov gauge last measured in July.

I expect many more people will have joined the crowd since then. It is inevitable during a price melt-up.

In the poll, another 6 percent told Yougov they don’t know. Perhaps some of the ‘don’t know’ have bought proxies for bitcoin, such as companies investing in it, or perhaps they have traded on apps that replicate the price.

Since they only have indirect ownership, they are not sure if they should call themselves crypto owners.

HMRC may be aware of your crypto

The point is that millions of people are investing in crypto and many of them will make huge profits. Meanwhile, the risk of owing capital gains tax and its rates increases.

The capital gains tax rate was increased in the budget with immediate effect, from 10 percent to 18 percent for lower-rate taxpayers, and from 20 percent to 24 percent for taxpayers in higher tax brackets.

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

Even before the tax changes and the rise in crypto prices, HMRC had identified an opportunity.

It knows that a lot of people use crypto exchanges and even banking apps to take advantage of crypto profits.

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

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

‘However, you did not indicate everything correctly. This means you may have to pay taxes.”

It also launched a denominational crypto declaration web page last November, urging investors to come clean about previous years’ gains.

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

Tax officials can look back 20 years if they think someone deliberately avoided paying.

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

It is also worth noting that she believes that some frequent trading activities are subject to income tax. However, for most crypto fans, CGT will be the challenge.

Do crypto investors even know they have to pay taxes?

HMRC’s concern is that according to its own 2022 research, only 34 percent of crypto 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, which declare and pay tax liabilities.

There are of course two common ways to avoid paying tax on your investment gains more broadly: by buying them through a shares Isa or a self-invested personal pension, or Sipp.

In crypto this is not easy.

That’s partly because the regulatory regime on this side of the Atlantic has not yet approved investment funds for private savers.

In the US, by contrast, there are more than 25 exchange-traded funds, holding billions of dollars, from the likes of Fidelity Investments and BlackRock.

Some British investors have gotten around this by investing in MicroStrategy, a US software and data company that has a stated strategy to buy bitcoin. It’s an accelerated play on the cryptocurrency – a riskier way to back a risky asset.

Others have opted for US-based Coinbase, a platform for buying and selling cryptocurrencies. Keep in mind that Coinbase shares have only just returned to their 2021 highs.

Perhaps the lesson – and one that’s hard to accept when non-crypto investors are feeling raw FOMO (fear of missing out) – is understanding the risk others are taking as they chase bitcoin higher.

The warning from John Kenneth Galbraith’s The Great Crash 1929 is useful. He noted the abiding belief of speculators that they can become rich without doing any work.

If that’s not enough, consider the hassle with the tax authorities that many crypto speculators will have to deal with.

I risk the wrath of crypto fans by saying this, but as a regular, retirement-oriented investor who likes to sleep easy, I’m sticking with the get-rich-slow approach to Isa and Sipp funds that can be safely shielded from the taxman. .