The following article is not tax or investment advice. You should consult with a professional financial advisor.

The UK government is rumoured to be considering increasing capital gains tax (CGT) to bolster public finances. A rise in CGT could have significant implications for various investors, particularly those invested in volatile assets like Bitcoin. In this blog, we’ll explore the expected changes to the CGT, how it will affect Bitcoin investors, and what steps can be taken to mitigate the impact.

What Is Capital Gains Tax and Why Is It Important?

Capital gains tax is a tax on the profit made from selling assets, such as stocks, property, and, more recently, cryptocurrencies like Bitcoin. The CGT in the UK is currently divided into two rates:

• 18% for basic-rate taxpayers
• 28% for higher-rate taxpayers

Bitcoin investors fall under this tax regime when they sell their cryptocurrency for more than they initially paid and profits surpass the annual CGT allowance. This tax rate can already feel hefty, especially for high-earning individuals, and any potential increase could make it even more burdensome.

Potential Changes in CGT Rates

In the face of rising national debt and budget deficits, there has been speculation about the UK government increasing CGT to align it more closely with income tax rates. For high earners, this could mean a jump from 28% to rates closer to 40-45%. Although there is no definitive announcement, these rumours have caused concern among investors, especially those holding highly volatile assets like Bitcoin. Some investors are already reacting to this expected change, triggering an asset firesale to limit the expected CGT rate rise before the budget.

How Will This Affect Bitcoin Investors?

Bitcoin investors are particularly vulnerable to changes in CGT for several reasons:

High Volatility

Bitcoin’s price can fluctuate wildly, and these dramatic swings often encourage investors to sell their holdings during price spikes. A higher CGT rate would reduce the net profit from such sales, discouraging opportunistic profit-taking.

Tax Efficiency Challenges

Unlike traditional investment vehicles such as ISAs (Individual Savings Accounts) or pensions, which offer tax shelters, cryptocurrency investments don’t benefit from such protection. This means any profit made on Bitcoin is more exposed to taxes.

Regulation

Cryptocurrency regulation is still evolving in the UK, and the government may introduce additional rules that could either tighten tax reporting or complicate the calculation of capital gains on Bitcoin holdings. Increased CGT would add another layer of financial pressure on investors navigating the regulatory environment.

What Can Bitcoin Investors Do to Prepare?

Given the uncertainty around a potential rise in CGT, Bitcoin investors could consider proactive strategies to mitigate the impact:

Use Tax-Free Allowances

Ensure you use the annual CGT allowance, which stands at £3,000 for the 2024/25 tax year. If you are close to this limit, selling portions of your Bitcoin holdings across multiple tax years could help minimise your tax liability.

Crystalise Unrealised Gains Before the Budget

You could consider selling some of your Bitcoin before the CGT rise is implemented. Here’s an example of how that might work:

• You purchased two Bitcoins worth £25,000 in October 2023, now worth £100,000 in October 2024. 
• You have a £75k unrealised gain, which, if you sold them, would result in £15,000 of tax at the current 20% rate.
• In the scenario of 45% CGT, this unrealised gain would mean a £33,750 tax charge, an increase of £18,750.

Bed and Spousing

You may consider another option if you would like to crystalise your unrealised gains while still keeping your Bitcoin exposure. If you believe the Bitcoin price will keep increasing and you prefer to realise gains in the future, you can optimise for that goal.

You could consider a ‘Bed and spouse’ strategy: liquidating your gains, transferring funds to your spouse, and then having the other party buy and hold the Bitcoin at the new cost basis.

Long-Term Holding

Investors who hold Bitcoin for the long term may avoid frequent taxable events by not selling anything. This strategy is particularly effective if you think future governments could reduce CGT and are prepared to wait it out.

Tax-Loss Harvesting

If Bitcoin's price dips, you can strategically sell your holdings at a loss to offset gains from other investments or carry the loss forward to future tax years to reduce your overall tax liability. This strategy requires careful timing but can be an effective way to manage tax burdens.

Seeking Professional Advice

Every investor's circumstances are different, and there is no one-size-fits-all strategy. Those with significant Bitcoin holdings should consult a financial advisor or tax expert to optimise their plans, help with strategic planning and explore more sophisticated tax-efficient investment options.

Conclusion

The potential rise in capital gains tax in the UK presents a significant challenge for Bitcoin investors. With high volatility and few tax-efficient avenues, preparing for potential changes is essential. By understanding the implications and adopting tax-efficient strategies, Bitcoin holders can reduce the impact of a potential CGT hike and keep their profits.

Approved by Archax Ltd on 10/10/2024