- The UK Budget will be revealed on March 3.
- A potential hike in capital gains tax could impact on crypto holders.
The UK Chancellor of the Exchequer, Rishi Sunak, is reportedly considering a big hike to capital gains tax in tomorrow's Budget—a move that would have a significant impact on cryptocurrency holders.
"Whilstmight not be directly on the Chancellor’s radar, if the well-publicized rumors of an increase in CGT rates materialize, this would enable the Chancellor to potentially reap some of the rewards gained by those who have been invested in this asset class," said Thomas Cattee, a white-collar crime lawyer at Gherson Solicitors.
In a 2020 report, the Office of Tax Simplification recommended that capital gains tax be more closely aligned with income tax, a move that would raise around £14 billion. That would effectively mean doubling capital gains tax rates; currently, capital gains tax is levied at 10% for basic-rate taxpayers (those earning up to £50,000) and 20% for higher-rate taxpayers (those earning over £50,000), while income tax is levied at 20% for basic rate taxpayers and 40% for higher-rate taxpayers.
The report also floats the possibility of reducing the Annual Exempt Amount for capital gains tax from £12,300 to either £6,000 or £2,500.
How crypto holders would be affected
The "vast majority" of cryptocurrency holders, according to HM Revenue and Customs, are liable to pay capital gains tax when they dispose of their crypto—either by selling it for fiat money, exchanging it for another cryptocurrency, using it to pay for goods and services or giving it away to another person.
If the Chancellor were to adopt the most stringent measures explored by the Office of Tax Simplification—a reduction of the Annual Exempt Amount to £2,500 and a doubling in capital gains tax—then the tax liability on a £50,000 profit for crypto investments for a higher-rate taxpayer would go up from £7,500 to £19,000.
It's not just higher-rate taxpayers who could be on the hook, though; reducing the Annual Exempt Amount would mean large numbers of smaller crypto holders could find themselves landed with a capital gains tax bill.
At present, taxpayers are only liable for capital gains tax on gains above £12,300, but the Office of Tax Simplification's report explores the possibility of reducing the threshold to as low as £2,500—which would mean 360,000 more people would have to report a capital gain.
However, not everyone is convinced that the Chancellor will impose large tax rises in the Budget. According to Nimesh Shah, chief executive of tax advisory firm Blick Rothenberg, it's too soon for the Chancellor to consider aligning capital gains tax rates with income tax—though it could be on the cards in the Autumn Budget. "It wouldn’t fit with a Budget that will primarily be about the extension of support," Shah argued.
Senior Conservative MPs have also urged the Chancellor to refrain from raising taxes in the Budget, with David Davis MP arguing that "you mustn't increase the tax burden."
Bitcoin miners could take a hit
One other group that could be affected by the Chancellor's Budget is Bitcoin miners.
Currently, HMRC treats crypto mining, mining fees and airdrops as "miscellaneous income," with the recipients liable for income tax. But, according to the Sunday Times, the Chancellor is considering a freeze in the threshold for income tax.
At present, people start paying the basic rate at £12,500 and the higher rate at £50,000. That was set to rise to £12,562 and £50,250 respectively; a freeze could result in 1.6 million people being pushed into a higher tax bracket before the next general election, set to take place in 2024.
Although that could see miners taking a financial hit, it would be substantially less than the impact on those liable for capital gains tax, were the Chancellor to follow through on the Office of Tax Simplification's suggestions.
One thing's for certain: with the government having borrowed a record £270 billion to combat the coronavirus pandemic and support furloughed workers and the unemployed, it will be looking to recoup those costs from somewhere—and withsurging from £4,890 at the start of the last tax year to around £35,200 today, crypto holders could prove to be a tempting source of revenue for the Chancellor.