Could the UK Budget Help Crypto ?

Yesterday was budget day here in the UK.

The Chancellor of the Exchequer, Rachel Reeves, delivered a budget which is the biggest tax hike in a generation.

The markets have responded with a noticeable drop in the value of the pound against the dollar and Euro. There has been a reduction in the value of British Gilts (government debt) at the same time as an increase in yield expectations - all an indication that UK government debt is seen as a less secure investment.

Image by Pete Linforth from Pixabay

Overview

It was very much a socialist budget, in line with the doctrines of the new Labour government - very much a traditional Labour "tax and spend" budget.

As with any budget, there are winners and losers. Winners seem to be the public sector, large corporates and foreign aid. But almost all of the pain falls on small businesses, family-owned farms, and middle class people with assets or investment portfolios.

An increase in the minimum wage will be good for those wage earners whose employers can afford it (large corporates and public sector employers), but small businesses, particularly those in the retail and hospitality sectors will find it hard to absorb the extra cost. Particularly on top of increases in national insurance and a doubling of business rates (tax paid by occupiers of all except the smallest commercial properties).

Expect increases in unemployment as SME's cancel plans to employ new staff, freeze pay rises, lay people off or even close down entirely. Prices are likely to have to increase as well, fuelling inflation.

Changes To Capital Gains Tax

But the change which will probably impact the middle classes the most are those which will remove the incentive to invest. The last (Conservative) government repeatedly reduced the threshold for Capital Gains Tax, and the current one is carrying on with that downward escalator.

If you don't know the difference, Income Tax is tax on wages and similar "earned" income, while Capital Gains Tax is a tax on the return on investments. So in many cases, you're taxed on the money when you first earn it, and then if you are sensible and invest it (including putting it in a bank savings account) you are taxed on any interest or gains you get from the investment.

In the budget, the rate of capital gains tax has a threshold of £3000, down from £6000 last year. Below this figure, no tax is due. By comparison, the threshold for Income Tax (referred to as the Personal Allowance) is £12570. But the real killer is the rate of taxation; over the threshold it rises from 10% to 18% for ordinary rate taxpayers, and from 20% to 24% for higher rate taxpayers.

In a particularly nasty twist, while most tax changes have traditionally applied from the start of the next tax year (April), this change is effective immediately. It seems the intention was to stop people getting rid of their share portfolios before increases took effect.

The Effect of Higher Taxation

I have seen even normally staid advisers saying that under the new rules, if you can't afford to leave the country you're better off spending your money as soon as you earn it, don't save anything and hope the state will pay for your care when you're old and infirm.

But I think there are options, for those willing to skirt the rules. It's been proven before that a tax regime perceived to be too unfair gathers less revenue for the government than it should. People start considering it ethical to find loopholes (especially if it's as over-complex as the UK tax system), under-declare income or work in the black economy.

Crypto Enters the Game

This could be where crypto comes into play.

There aren't many on-ramps for crypto in the UK, and most of the ones there are have to report activity to HMRC (His Majesty's Revenue and Customs).

But HMRC's IT systems are archaic and unreliable, with lots of individual data silos that don't talk to each other operated by staff who are under-trained, under paid and under pressure. So once crypto is bought, they don't really have the tools to find out what has happened afterwards, especially if it's moved off the big exchanges.

I can see a scenario where people buy crypto, move it around a bit and finally land it in a DeFi application which generates a return. After that you either spend the crypto directly to buy things online, or move it onto a pre-paid card that you use like a credit card and which converts your crypto to fiat as you spend it.

Unless you commit a political crime or spend massively above your declared income, the UK government are unlikely to have the expertise or resources to investigate.

Conclusion

I've only looked at one portion of the budget's impact here, and only from one perspective as an amateur observer. It's a massive and complex policy document that will take time even for experts to fully decode.

But I expect the financially astute may just put some of the money they would previously have invested in shares, residential property or savings accounts into things like gold and crypto. It'll be a subtle thing over a period of time, but it'll be interesting to see how it pans out.

Posted Using InLeo Alpha