- Six in ten crypto holders (58%) don’t know the tax implications
- Of those who were aware only 45% identified possible CGT charge
- HMRC paper a ‘warning shot across the boughs’ for those with large crypto profits
- 8% of the UK adult population hold crypto assets
- 16% said it was likely they would buy cryptos in future
- 52% say they held crypto for fun & 8% see it as a gamble
Laith Khalaf, head of investment analysis at AJ Bell, comments on HMRC’s crypto research, released today:
“When the tax authorities commission a report into the behaviour of crypto holders, you can bet there’s an ulterior motive at work. HMRC’s finding that six in ten crypto holders (58%) don’t know the tax implications of transacting in crypto should be a warning shot across the boughs of anyone who has made large crypto profits. Indeed, even of the four in ten who were aware there could be a tax liability, only 45% correctly identified there may be a capital gains tax charge.
“The fact that HMRC’s research was conducted in the first half of 2021, dated February 2022, and released in July 2022, might lead some to conclude that the taxman has little chance of catching up with something as fast-moving and potentially clandestine as crypto trading. Perhaps so, but the penalties for not complying with tax laws are significant, and ignorance is no defence.
“The small amounts of crypto held by most investors, combined with the annual Capital Gains Tax allowance of £12,300, mean that for the vast majority, CGT is an academic issue. But crypto investors are at risk if they have large holdings, profits from frequent trading, or other assets generating capital gains. This is particularly the case if they encashed last year before the crypto price falls we have seen in the last six months.
“HMRC’s research also shows that 8% of the UK adult population hold crypto assets, and 16% said it was likely they would buy some in future. To put that in context, around 11% of UK adults hold a stocks and shares ISA, a mainstream financial account that is tax-free and has been around since 1999 (or indeed 1987 if you want to include PEPs which were the forerunner of ISA accounts). It seems the attraction of trying to get rich quick is more compelling for some people than the slow and steady routine of annual ISA investment, given that crypto holders are now almost as prevalent as stocks and shares ISA investors in the UK, despite crypto really only becoming widely available in the last five years or so.
“Indeed, HMRC’s survey shows the short term outlook of crypto investors - only 4% say they intend to hold on for more than 5 years, typically viewed as the bare minimum you would need to invest in something as volatile as the stock market, which is significantly more stable than cryptoassets. 28% said that crypto was too variable for them to commit to a holding period, and that is fair comment, given the gains that can be delivered over a short space of time. The conservative investment house, Ruffer, took what they believed was a long term position in Bitcoin at the start of 2021, but found themselves selling down their holding within months of initiating it, such was the tremendous profit they had achieved in the blink of an eye.
“The vast majority of crypto investors are only dabbling with a relatively small amount of money, with only 7% holding more than £5,000. Reassuringly, most are also treating it as a punt, with 52% saying they held crypto for fun, and 8% saying it was a gamble. However, one in five (19%) said that crypto was a core part of their investment portfolio, even though it is spectacularly volatile.
“FCA research published last year found that 14% of crypto holders had borrowed money to invest. So while the majority of investors are treating crypto as a bit of fun with a very small part of their overall savings, at the periphery there is still the potential for consumer harm, and that is likely to be coming home to roost now crypto prices are sinking. The golden rule of crypto is don’t invest any money you aren’t willing to lose in its entirety”
