New regulations are set to significantly impact crypto investors in the UK. As of January 1, 2024, the Cryptoasset Reporting Framework (CARF) mandates that cryptocurrency investment platforms share user account details with HM Revenue and Customs (HMRC) for tax purposes. This move aims to tighten the oversight on crypto transactions and ensure compliance with tax obligations.
The CARF, a multinational agreement, requires crypto firms to disclose information regarding the activity and tax residency of their users. This means that details about non-UK users will be exchanged with jurisdictions that have also adopted CARF. Conversely, HMRC will receive data about UK-based investors who have interacted with platforms in other CARF-compliant countries. According to Dawn Register, a tax dispute resolution partner at the accountancy firm BDO, “These new rules coming into force from January 1 will give HMRC access to a much richer dataset on crypto asset investors and their transactions.”
This enhanced data-sharing capability is expected to make it more challenging for investors to evade reporting capital gains from cryptocurrencies, including popular assets like Bitcoin, Ethereum, and Tether. The rules will allow HMRC to better target UK tax residents suspected of failing to declare their gains.
Understanding Tax Implications for Crypto Investors
Crypto assets, including cryptocurrencies, are subject to capital gains tax (CGT) when they are disposed of. This includes scenarios such as selling a crypto asset for traditional currency, trading it for another cryptocurrency, spending it, or gifting it to someone other than a spouse or charity. If an investor’s total gains exceed the CGT threshold, they are required to report these gains on their tax return and pay the applicable CGT.
Historically, the decentralised nature of cryptocurrencies has posed challenges for tax authorities in collecting owed capital gains. “HMRC has been concerned for some time about high levels of non-compliance among crypto investors,” Register noted. Investors who have realised gains during the 2024-2025 tax year may need to file a tax return by 31 January 2026.
In an effort to improve compliance, HMRC is also encouraging those who have underreported CGT on crypto assets in previous years to rectify their tax affairs. A disclosure facility for undeclared gains or unpaid tax will be available before April 2024.
Strategies to Mitigate Capital Gains Tax
Investors who have disposed of crypto assets at a loss can offset these losses against their profits for CGT purposes. “Investors can also report losses up to four years after the end of the tax year in which they disposed of a crypto asset. These can be offset against any CGT charge in the current tax year or carried forward to future years,” explained Register.
While most crypto assets cannot be directly held in an Individual Savings Account (ISA), there are alternative ways to gain exposure to crypto price movements within tax-efficient structures. Crypto exchange-traded notes (ETNs) can be held in a stocks and shares ISA until April 5. After this date, they must be held in the less common Innovative Finance ISA. This requirement poses risks for crypto ETN investors, as they may be compelled to sell at a loss during market downturns, thereby crystallising losses. Despite this, such losses could still be offset against other gains for CGT purposes.
As the landscape of cryptocurrency investment evolves, investors are advised to stay informed about their tax obligations and explore strategies to manage their capital gains effectively.
