- The UK finance minister is about to announce Labour’s first budget.
- Capital gains tax already hits crypto holders hard, says CryptoUK.
Crypto holders should pay attention when the UK’s finance minister Rachel Reeves announces on Wednesday her party’s first UK budget in more than a decade.
That’s according to Suzanne Morsfield, policy advisor at trade association CryptoUK, who said the prospect of Reeves hiking capital gains tax above 28% will hit the some five million crypto holders in Britain particularly hard.
“There’s a perception that capital gains tax mostly reaches the upper echelons of society… that it’s a way of making the wealthy shoulder more of the burden,” Morsfield told DL News.
“That’s not 100% accurate, especially when it comes to crypto.”
Her caution comes after the British tech community warned that a tax hike may drive innovative firms away.
It adds more pressure to the finance minister’s historic budget, a sweeping government financial plan that tends to rock markets in real time. Labour’s party’s first budget in 15 years — and the first to be announced by a female chancellor — comes after the party’s historic July 4 election rout saw many Conservatives ousted from power.
The government already faced a backlash after it announced plans to axe winter fuel payments, which risks cutting into poorer pensioners’ savings.
What is capital gains?
Tax on capital gains refers to earnings from investments into assets like shares or property. It affects very few people in the UK.
This year, for instance, capital gains tax is expected to raise £15.2 billion — just half of what will be gathered from income tax.
However, almost all crypto investors are affected, as the primary way of taxing crypto assets is under the capital gains regime, Morsfield said.
CryptoUK said that’s unfair, especially as many of the UK’s investors aren’t rich.
Morsfield pointed to figures from the Financial Conduct Authority, which say that 63% of the UK’s five million crypto owners hold £500 or less in crypto. The mean holding was £1,600.
“So we’re not talking about the uber-wealthy only being affected by this — it’s everyday people with relatively small holdings who will get hit disproportionately,” she said.
‘It’s everyday people with relatively small holdings who will get hit disproportionately.’
Reeves is considering hiking capital gains tax to fill what the Treasury said was a £22 billion hole in the public finances left by the Conservative government.
“The chancellor has an unenviable challenge ahead — closing a vast public funding gap that looms over the party’s leadership,” Xapo Bank COO Dary McGovern told DL News.
Prime Minister Keir Starmer promised that Labour won’t raise taxes that hit working people — VAT, income tax, and national insurance. But it will hike taxes on capital gains and inheritance.
Press reported that Reeves was modelling a hike as high as 39%. Starmer then denied it would be that steep.
Crypto tax in the UK
In the UK, crypto is taxed like stocks.
If you sell your crypto, receive it as a gift, or move it around in some way, you probably have to give some of that to the government under the capital gains regime — 10 to 18% for basic rate taxpayers, or 20 to 24% for higher income taxpayers.
Crypto holders are particularly vulnerable to capital gains tax, Morsfield said. For one, you can’t put crypto into ISA accounts, which shield assets from tax up to a certain threshold.
Another reason is that certain decentralised finance lending transactions are taxed more punitively than comparable transactions made in traditional assets, Morsfield said.
The dangers
It’s extremely unlikely that every crypto investor in the UK will sell off their crypto en masse to the degree that it would create a market event, Morsfield said.
Still, she said, if the government wants to collect revenue on any asset subject to capital gains, it must calibrate the hike carefully — hike it too high and investors hold on to their assets, depriving the government of the revenue it hoped to raise.
“The punchline is that with capital gains taxes, people change their behaviour,” Morsfield said.
“Investors decide to sell earlier or hold on longer, and then you don’t get the taxes you’ve modelled for.”
Capital gains hikes may appeal to Reeves as a short-term fix, but could discourage long-term investment, McGovern said.
“Labour must ensure that investors aren’t driven to riskier short-term positions, and instead are confident to put their money into safer, long-term investments like Bitcoin,” he said.
Reach out to the author at joanna@dlnews.com