Crypto investors at tax risk

Staying on top of transaction records is crucial for anyone involved in cryptocurrency trading to ensure compliance with capital gains tax regulations. Given that gains must now be disclosed in tax returns, maintaining accurate records is essential to avoid potential tax discrepancies.

With the reduction of the capital gains tax (CGT) allowance to £3,000 from £12,300 just over a year ago, individuals face a heightened risk of encountering unexpected tax liabilities stemming from capital gains. This adjustment underscores the importance of diligent record-keeping to manage tax obligations effectively.

Despite the growing popularity of crypto assets like Bitcoin, Ripple, and Ethereum as investment vehicles, there remains a notable gap in public awareness regarding the tax implications associated with these investments. Both the Chartered Institute of Taxation (CIOT) and the Low Incomes Tax Reform Group (LITRG) have expressed concerns about inadequate communication from HMRC regarding tax risks.

For the tax reporting period beginning in 2024/25, self-assessment tax returns will feature a dedicated section for reporting gains arising from crypto asset disposals. However, the CIOT and LITRG are urging HMRC and the government to take proactive steps to ensure that all investors are well-informed about the tax consequences. Additionally, investors are encouraged to maintain comprehensive and accurate records to facilitate tax compliance.

The inclusion of a dedicated crypto asset section in tax returns marks a positive stride towards ensuring that relevant transactions are accurately reported to HMRC. However, individuals anticipating the need to report crypto asset activity in their 2024/25 tax returns must ensure they maintain comprehensive records for this purpose.

Given the reduction of the CGT annual exemption to £3,000, an unprecedented low, a larger portion of the population will now fall under the obligation to report and pay CGT, potentially for the first time.

There is a genuine concern that many individuals may be unaware of this obligation and could face unexpected HMRC tax and penalty charges in the future, which could catch them off guard. We urge HMRC to intensify efforts to inform the public about their tax responsibilities related to crypto asset investments, as well as the reduced CGT annual exemption.

This effort should include raising awareness about the importance of maintaining accurate records from the outset of investing in crypto assets.

By ensuring widespread awareness of tax obligations, HMRC can enhance compliance and reduce the need for pursuing overdue tax payments.