The UK finance minister is getting ready to announce Labour’s first budget, which could really impact crypto holders. According to CryptoUK, capital gains tax already puts a heavy burden on these investors. Suezan Morsfield, a policy advisor at CryptoUK, warns that if the capital gains tax goes above 28%, it could hit around five million crypto holders in the UK hard.
Morsfield points out a common misconception: many believe that capital gains tax mainly affects the wealthy. She says, “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.” This isn’t entirely true, especially when it comes to crypto investors.
The British tech community is sounding alarms. They warn that a tax hike could push innovative companies out of the UK. This adds extra pressure on the finance minister as she prepares for a historic budget. It’s Labour’s first budget in 15 years and the first one ever delivered by a female chancellor.
The government has already faced backlash for plans to cut winter fuel payments, which could hurt lower-income pensioners.
So, what is capital gains tax? It’s a tax on earnings from investments like stocks or property. Not many people in the UK are affected by it. This year, capital gains tax is expected to bring in £15.2 billion, which is only half of what’s projected from income tax.
Almost all crypto investors fall under this tax because it’s the main way the government taxes crypto assets, according to Morsfield. She believes this is unfair, especially since many UK investors aren’t rich.
Morsfield highlights data from the Financial Conduct Authority. It shows that 63% of the UK’s five million crypto owners hold £500 or less in crypto. The average holding is about £1,600. “So we’re not just talking about the super-rich being affected by this — it’s everyday people with relatively small holdings who will get hit disproportionately,” she explains.
Reeves is thinking about raising capital gains tax to fill a £22 billion gap in public finances left by the previous Conservative government. Dary McGovern, COO of Xapo Bank, states, “The chancellor has an unenviable challenge ahead — closing a vast public funding gap that looms over the party’s leadership.”
Prime Minister Keir Starmer has promised that Labour won’t raise taxes affecting working people, like VAT, income tax, and national insurance. However, they do plan to increase taxes on capital gains and inheritance. Reports suggest that Reeves is considering an increase as high as 39%, but Starmer has denied it would be that steep.
In the UK, crypto is taxed like stocks. If you sell your crypto, receive it as a gift, or transfer it in any way, you may have to pay some tax under the capital gains regime. This ranges from 10% to 18% for basic rate taxpayers and 20% to 24% for higher income taxpayers.
Morsfield points out that crypto holders are particularly vulnerable to capital gains tax. For example, you can’t put crypto into ISA accounts, which protect assets from tax up to a certain limit. Plus, some decentralized finance lending transactions are taxed more harshly than similar transactions involving traditional assets.
She expressed doubt that a mass sell-off would happen among UK crypto investors in response to a capital gains tax hike. Still, she cautions that if the government wants to collect revenue from any asset subject to capital gains tax, it needs to be careful about how much it raises the tax. If it’s too high, investors might hold onto their assets, and the government won’t get the revenue it hopes for.
“The punchline is that with capital gains taxes, people change their behavior,” Morsfield says. “Investors decide to sell earlier or hold on longer, and then you don’t get the taxes you’ve modeled for.”
While raising capital gains tax might seem like a quick fix for Reeves, it could discourage long-term investment, according to McGovern. “Labour must ensure that investors aren’t driven to riskier short-term positions and instead feel confident putting their money into safer, long-term investments like Bitcoin,” he advises.