The ‘crypto winter’ won’t save you from big tax bills

Losses made in the current tax year cannot be offset against gains made in 2021-22 – on which tax is due next month. By Charlotte Gifford

Investors and speculators in digital currencies face huge tax bills next month even if they suffered heavy losses in the recent “crypto winter” of falling prices, experts have warned.

Investors who made significant gains when cryptocurrency prices surged in the 2021- 22 tax year will need to report their capital gains and pay tax on them by the end of next month. Many may think that because of the losses they have made in the current tax year, they will not owe capital gains tax (CGT). The price of Bitcoin has fallen by 72pc in a year.

But while losses can be offset against gains made in the same or future tax years, they cannot usually be offset against profits made beforehand. This means that investors could still face huge CGT bills on profits they made in the tax year that ended in April this year. There is even more tax pain on the horizon for crypto investors because the CGT allowance will soon be dramatically cut.

Many crypto investors who have made losses this year may not have put aside money for CGT liabilities, but tax firm RSM has warned that even investors who are in the red could still have tax to pay. Chris Etherington from the firm said investors who had locked in heavy losses this year might have crystallised gains last year, but they generally could not offset the losses against the gains.

Any time an investor sells an asset such as cryptocurrency it counts as a “disposal”, which is liable to CGT. If their annual profit exceeds the CGT allowance, tax is due at 10pc for basicrate taxpayers and 20pc for higherrate and additional-rate taxpayers.

Meanwhile, many more crypto investors who make profits in future years face CGT bills as a result of the cuts in the annual allowance announced in the Autumn Statement.

Hugo Biolchini, 24, from London, started investing in Bitcoin in 2019 when he noticed the price had fallen from $20,000 (£16,000) to just $4,000. He bought 25pc of his current Bitcoin holdings in 2019 and 75pc in March 2020 when the price was between $6,000 and $7,000, compared with about $17,000 now.

Like many, Mr Biolchini’s investment has suffered this year but the size of his previous gains has cushioned his fall and he is still up by $10,000. His investment grew more than tenfold as the price of Bitcoin soared in 2020 and 2021. He took $25,000 in profit in those years.

Because the profit was made over a two-and-a-half-year period, he has stayed within the current annual capital gains allowance of £12,300 and has not yet had to pay tax on his crypto investments. However, in future he believes he will have big bills to pay because the allowance is to be cut next year to £6,000 and then to £3,000 in 2024. As a result more crypto investors will have to pay tax, even on relatively small gains.

Investors are also concerned that the dramatic reduction in the CGT allowance could coincide with the next bull run in the crypto market, eating into the profits they hope to make in the future.

Simon Peters of investment platform eToro said many were forecasting cryptocurrency values to rise again as inflation peaks and interest rate forecasts start to normalise.

“A Bitcoin bear market or ‘crypto winter’ has generally lasted one to two years following an all-time high,” he said. “The first year or phase tends to be a significant fall from the alltime high, in the region of 70pc-85pc, and the second phase a long period of price consolidation leading up to the next ‘ block reward halving’.” This is when the reward for mining Bitcoin is cut in half, reducing the supply of new coins and therefore driving up the price. Mr Peters said he believed the market was still in the first phase.

HMRC says investors must keep records for each transaction, including the type of crypto, the date of disposal and the value of the crypto in pounds. If it finds that an investor should have paid tax on crypto assets and did not correctly report their liability on a tax return, they could face interest and penalties.

It is not just CGT that crypto investors need to worry about. Those who make an income from cryptocurrency – for example through regular trading or through creating and selling digital assets – may also have to pay income tax.

Mr Etherington said as the price of cryptocurrencies has plummeted, many who owe income tax could struggle to pay the bills. He said: “You may have been paid in a digital asset like Solana when it was worth $249 but which has now crashed to $13. If you had triggered an income tax liability, you will need to settle it in January 2023. But you may not have the funds to do so because your investment is now a fraction of what it was once worth.”