Tax changes affecting cryptoasset reporting to HMRC are due to take effect in April next year, write Sean Hill, manager, and Sam Goodsell, partner, at accountancy firm, Menzies LLP.

Crypto investors should prepare for these changes now to ensure that they are not caught out by the proposed reporting requirements, but what do they need to know?

Tackling the crypto-as-a-criminal service

The realm of cryptocurrency has previously been seen by the government as a haven for criminal activity, and to tackle this, HMRC has until now focused mainly on seizing assets from criminal gangs and terrorist cells. However, with growing awareness of crypto investment, HMRC has now seemingly turned its attention to crypto investors and will be creating a separate section within the self-assessment tax return for cryptoasset capital gains tax (CGT).

With the changes due to arrive next year, crypto investors need to be aware that any gains made when transacting in cryptocurrency may be taxable and should seek professional advice if appropriate. They also need to understand the tax-free threshold surrounding CGT, which is currently set at £6,000 per individual for the tax year 23/24, but is expected to reduce to £3,000 per individual for the tax year 24/25.

Lowering the threshold for Capital Gains Tax

This lower threshold will mean that more investors than ever will be liable for CGT, and they should prepare accordingly. If they fail to do so, HMRC have the power to open an enquiry into their tax affairs and issue penalties to individuals who fail to meet their reporting obligations. Whilst HMRC is focused on raising awareness of the need to pay CGT for now, a similar approach could be introduced for income tax in the future.

Creating a separate cryptoasset reporting form within the self-assessment regime could be an attempt by HMRC to raise further awareness that these assets can generate a taxable capital gain that needs to be reported. However, this is not necessarily the only reason behind the change.

With the UK set to position itself as a leader in cryptoassets and tech investment, giving crypto-gains a special section on personal tax returns could also be a useful data-gathering exercise. The UK Government may want to increase its knowledge of crypto investment activity to learn more about how this compares to the US and other countries. If we assume that the separate form for disclosing crypto-CGT is a data-gathering exercise, it could follow that HMRC is attempting to close any reporting loopholes. By building a bank of reliable data, there will be greater transparency of the gains that are being disclosed, and those that are not.

The introduction of the digital pound

This also comes as the Bank of England considers the case for a digital pound, a form of central bank digital currency (CBDC). Whilst digital currency will be a new concept for many people, crypto investors could be at an advantage should it be implemented, due to their knowledge of digital wallets and online safety protocols. Storing cryptoassets can be a minefield, with factors to consider including where to store it, how to move it and how to access it; something that is likely to put those with experience ahead of the curve.

One of the benefits of transacting using some cryptoassets is that decentralisation creates a streamlined, frictionless process, with instant transactions. By contrast, transactions between centralised bank accounts can be much slower. The digital pound will bridge any gap between investor confidence around crypto market volatility and speed of transacting.

Time to reassess your portfolio?

The changes to the reporting of crypto-CGT could mean that the ‘wild west’ era of tech investment is over. Crypto investors need to ensure that their investment portfolios are in good order and be prepared for a change in reporting requirements next year.