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Those who have done well investing in cryptocurrencies are finding high tax liabilities on the flipside of the digital coin.
The price of bitcoin has surged by over 350 per cent in the past three years. Even UK-based investors like me who bought a small amount of crypto as an experiment years ago could now have the problem of a capital gains tax bill to contend with if they decide to trade or cash out their stake.
Those who built up much larger amounts may already have received a “nudge letter” from HM Revenue & Customs — about 65,000 were sent in the last tax year, and a new ad campaign this week urges crypto “bulls” to pay any tax owed.
If only it were possible to shield crypto from CGT in your Isa or Sipp (self-invested personal pension) I hear you sigh! Well, now you can — sort of.
A major rule change last week from the UK financial regulator means it’s now technically possible to hold exchange traded notes (ETNs) tracking the price of different cryptocurrencies such as bitcoin and ethereum within a Sipp or stocks-and-shares Isa. BlackRock and WisdomTree are among those launching crypto ETNs this week, but in practice, few investment platforms are yet offering them to Isa and Sipp customers. Why?
Two big stumbling blocks have emerged. The first is HMRC’s bizarre decision to permit crypto ETNs in stocks-and-shares Isas for the current tax year only. Next April, investors will have to sell or transfer their holdings to an Innovative Finance Isa — a niche product that none of the big DIY platforms currently offer (or tell me they plan to). While HMRC is keeping this “under review”, most platforms are holding fire on Isas, and hoping for a U-turn. Trading212 and Interactive Investor have gone ahead.
The second issue is how platforms will guide customers through the extra regulatory requirements for crypto ETNs, which are classified as an RMMI (restricted mass market investment). Ordinary Isa and Sipp investors can only buy them if they confirm they will hold no more than 10 per cent of their net assets in high-risk investments; pass an online test showing they understand the additional risks involved; and complete a 24-hour cooling off period prior to trading.
This is going to take a while for the retail investment industry to digest. Some neobrokers such as eToro already offer high-risk investments, including direct crypto exposure, so have these processes in place. But the more established platforms are proceeding more cautiously.
Most tell me they are adopting a “wait and see” stance as they test the regulatory waters and assess customer demand. My best guess is that customers of most Sipp platforms will have to wait until at least January — but Isas could take a bit longer.
Privately, most platform bosses think a stocks-and-shares Isa is a more natural home for this kind of investment. Some may question why crypto investors should receive any kind of tax break at all. However, I’d argue that the powerful allure of crypto could be a great way to alert younger investors to the wider benefits of stocks-and-shares Isas — particularly if the RMMI rules limit their tax-free crypto exposure to 10 per cent.
We don’t yet know how platforms will enforce this rule in practice. But we know that more than 7mn people — around 12 per cent of UK adults — hold some form of crypto. They are statistically more likely to be male, aged between 18-34 and to have a household income of £100,000 or more. Will they want to wait until the age of 57 to access the proceeds of crypto investments held inside a pension? Or are they hoping instead to trade their way to a property deposit in their 30s?
UK investors can already gain crypto exposure inside Isas and Sipps if they buy shares in “crypto proxies” such as Strategy, the US software company that holds bitcoin as its primary treasury reserve asset; bitcoin miners; or crypto exchanges such as Coinbase. In some cases, it’s possible to leverage these trades within a tax wrapper, which makes crypto ETNs seem relatively vanilla by comparison.
The optimists point to recent HMRC U-turns allowing fractional shares and LTAFs (long-term asset funds) to be held in Isas. Could permitting crypto ETNs in Lifetime Isas and Junior Isas be next? HMRC says it is consulting with the industry on how the draft legislation will work in practice, clarifying that crypto ETNs can be held in Junior Sipps if the adult administering the account passes the tests. However, platforms I spoke to were wary of being the first to allow this.
Should they be? Crypto is routinely talked about by schoolchildren up and down the land. While I have mixed feelings, it’s certainly one way of educating the “next generation of investors” about using stocks-and-shares Isas and pensions to build long-term wealth, and by doing so, encourage diversification into more traditional forms of investing. Older investors trying to calculate the capital gains tax liability on their crypto trading are sure to agree.
Claer Barrett is the FT’s consumer editor; claer.barrett@ft.com
