Investors in the cryptocurrency space have been keeping an eye on a ticking clock, counting down the days before the predicted Bitcoin halving date – the date when the rewards for mining Bitcoin are halved, say Chris Etherington, tax partner and Miruna Constantin, tax manager at RSM.
Many are predicting this will be in the middle of April. Historically, Bitcoin has significantly risen in value following a halving date and there is a lot of speculation that there might be a similar growth pattern in the coming year.
However, it could be that investors are looking at the wrong countdown clock and they should instead be counting the days down to the tax year deadline on 5 April. Whilst investors involved in crypto assets may be aware that means they need to start thinking about tax reporting, they should also be thinking about whether they could be taking sensible steps now to minimise their exposure to a future tax liability.
As part of the tax raising steps taken by the chancellor in recent years, the capital gains tax (CGT) annual exemption has been slashed to £6,000 per person in the current tax year and is set to fall further to £3,000 per person from 6 April. It may therefore be worthwhile for some crypto investors to consider whether they should be looking at maximising the use of these allowances.
One common strategy that is used by married couples and those in civil partnerships is to ensure that both individuals are fully utilising their CGT annual exemptions. A challenge with this can be a set of rules that can apply to investors known as ‘bed and breakfasting’. The ‘bed and breakfast’ rules broadly prevents an individual from triggering a capital gain by simply selling shares one day and reacquiring shortly afterwards.
These rules can also apply to investments in crypto assets. One option that could be considered to trigger a capital gain for married couples is an investment strategy commonly known as ‘bed and spouse.’ This could involve an investment in a cryptocurrency being sold by an individual and then bought back in the name of their spouse or civil partner.
Of course, tax is not the only point to consider here and it involves a genuine gift being made by one person to another, so the couple need to be comfortable with that.
Such a gift is relatively straightforward in relation to shares but could have practical challenges and costs involved if it is a gift of a cryptocurrency. It might also involve a difficult conversation of educating a spouse or civil partner on what you are invested in and why, perhaps not as easy where substantial sums are held in a dog-themed memecoin.
Besides sharing the CGT burden with their spouses, individuals receiving income from staking, mining or airdrops could also maximise the use of the trading and miscellaneous income allowance. The allowance exempts up to £1,000 of income received by an individual each tax year from income tax.
This means that if the investments are equalised between spouses, each couple could potentially benefit from up to £2,000 tax-free crypto income and make use of the lower income tax rates on the excess.
The clash between the world of cryptoassets and taxes can give rise to a raft of difficult questions. HMRC will no doubt be keeping a keen eye on taxpayers to ensure they are disclosing any crypto gains and income appropriately, ensuring they get their fair share of any profits made.
It has never been more important for crypto investors to plan ahead and ensure they understand the potential tax implications of their investment plans.
By Chris Etherington and Miruna Constantin at RSM
