BRITISH investors are facing a major shake-up as the taxman prepares to boot cryptocurrency out of popular Stocks and Shares ISAs.
From April 6, a new rule from HM Revenue & Customs (HMRC) means you will no longer be able to buy crypto-linked investments within these tax-free investment accounts.
The move comes as a blow to savers who wanted to use their annual £20,000 allowance to profit from the digital currency boom without paying a penny in tax.
To understand the change, you first need to know how people “on the street” currently invest in crypto through their banks or apps.
Most people don’t buy Bitcoin directly in an ISA.
Instead, they buy something called an Exchange Traded Note (ETN).
Think of an ETN like a tracker fund that follows the price of Bitcoin or Ethereum, but you buy it on the stock market just like a share in Tesco or BP.
Up until now, some investment apps allowed you to tuck these crypto trackers inside a Stocks and Shares ISA, meaning any massive gains were shielded from the taxman.
But from the start of the new tax year, HMRC is moving the goalposts by reclassifying these crypto trackers.
Officials say crypto is too “innovative” and risky for a standard ISA, so they are moving it into a different, more obscure bucket called an “Innovative Finance ISA.”
The big problem for savers is that almost no mainstream investment platforms actually offer this version of the ISA.
Experts have branded the situation a “mess” and a “damp squib” because the apps that sell crypto trackers don’t offer the new ISA, and the firms that do offer the ISA don’t sell crypto.
Jason Hollands, managing director of wealth manager Evelyn Partners, said: ““This is a mess all round. All the regulation points in different directions and the whole thing sounds like it’s going to be a damp squib.
“Innovative finance ISAs providers are nearly all P2P lending platforms, property lenders and a bit of crowdfunding and there is no reason for them to go into this area.
“It involves entirely different infrastructure to offer shares on the [London Stock Exchange] and it’s not their business model.”
The government says it will keep the rules under review and could allow crypto products back into mainstream Stocks and Shares ISAs in future, once the market has “matured”.
HMRC has also said investors will not be forced to sell existing crypto ETNs held in ISAs straight away, to avoid causing “market disruption”.
However, many mainstream platforms don’t plan to offer an Innovative Finance ISA.
They have warned they may automatically move clients’ crypto ETNs out of Stocks and Shares ISAs into taxable general investment accounts – or sell the holdings – unless customers take action.
What should I do with my holdings?
Many investors are feeling the heat because selling your crypto investment right now could be a disaster for your overall returns.
Bitcoin’s price has been on a downward slide for four straight months, crashing from an all-time high of over $126,000 (£93,091) to around $65,500 (£48,393) which represents a 48% drop.
If you are forced to sell while the market is in the gutter, you effectively “lock in” those losses and lose the chance to benefit from any future recovery.
If you do not want to realise these losses but your platform is forcing you to move, you might consider shifting your investment into a General Investment Account (GIA).
Moving your money to a GIA is a safer bet if you want to hold onto your assets and wait for the price to bounce back, but there is a major catch regarding the taxman.
Unlike an ISA, a GIA has no tax-exempt status, which means you are fully exposed to both Income Tax on any dividends or interest and Capital Gains Tax (CGT) on any profits you make when you eventually sell.
Investors using a GIA must report their income and gains to HMRC once they exceed the small annual allowances, making it far less “cushy” than the tax-free ISA world.
For those whose platforms have already sent out warnings that they will automatically sell off crypto assets, it is vital to act quickly to protect your cash.
It could be worth checking if you can transfer your holdings to an Innovative Finance ISA provider that actually accepts crypto ETNs, or simply moving them into a GIA with your current platform to avoid an unwanted automatic sale.
For now, anyone hoping to ride the crypto wave tax-free has only a matter of weeks left to act before the shutters come down for good.