If you hold cryptocurrency the chances are you’re hoping your investment will grow over time as digital currencies are more widely adopted.
As such, you might be wondering if there’s a tax efficient way of ‘hodling’ your Bitcoins by investing them in your SIPP or ISA as you would traditional fiat currency.
We’ve already written about the risks of Capital Gains Tax eating into your cryptocurrency profits and how you can avoid paying it, but here we examine if you can you invest your pension in Bitcoin and take advantage of the tax benefits?
Can I hold Bitcoin in a SIPP or ISA or add it to my pension?
The simple answer is no, you can’t directly invest or hold Bitcoin or cryptocurrency in your SIPP (Self-Invested Personal Pension) or ISA in the UK, but there are a few options.
At one point UK residents were allowed to buy various trackers, such as Grayscale Bitcoin Trust or XBT Provider.
But the Financial Conduct Authority outlawed this because they felt the risks were too high for the average investor to be exposed to and all funds involving Bitcoin derivatives was removed from sale to retail investors.
How can I gain exposure to cryptocurrency in my SIPP or ISA?
It is possible to gain exposure to crypto indirectly within a SIPP or ISA wrapper by purchasing shares crypto-related companies.
- Bitcoin and cryptocurrency mining firms.
- Blockchain infrastructure providers
- Cryptocurrency trading exchanges
For example, Argo Blockchain Plc (ARB), the only cryptocurrency mining company listed in the London Stock Exchange at the time of writing, would give you indirect exposure to Bitcoin and other cryptocurrencies.
Argo’s activities focus on Bitcoin and crypto mining infrastructure. In other words, they facilitate the technology that verifies transactions and adds new blocks to the blockchain.
The company, which has offices in Jermyn Street, London, UK, lists its main spheres of activity as North America and Canada where it focuses on the use of hydropower in its mining operations.
Another way of gaining crypto exposure in your SIPP or ISA is through Invesco’s Elwood Global Blockchain UCITS ETF, which is also listed in the London Stock Exchange.
The index offers investors exposure to range of companies around the world involved in blockchain technology. Again, you’re not actually buying exposure to cryptocurrency, but rather companies involved in the infrastructure.
KR1 Plc is another blockchain investment company, which also offers exposure to Decentralised Finance (DeFi) projects and many other decentralised platforms.
Buying shares in companies like this within your SIPP or ISA through a platform such as Hargreaves Lansdown will enable you to benefit from the tax benefits these wrappers bring.
Buying shares in crypto companies is still high-risk
Like all things associated with the volatile world of cryptocurrency, you need to understand that the companies associated with digital assets are still classed as a high-risk investment and you could potentially lose all your money.
This market volatility is reflected in Argo’s share price, which has bounced around in line with the overall crypto market as developments – both positive and negative – have caused often dizzying price swings.
There is no Financial Services Compensation Scheme coverage for crypto businesses or digital assets, which are still largely unregulated.
Another way of gaining indirect exposure to the digital currency market in a SIPP or ISA is to buy shares in cryptocurrency exchange Coinbase (COIN) which listed on the Nasdaq in 2021.
Coinbase acts as a way for individuals to buy and sell a growing list of cryptocurrencies and altcoins and store them via its wallet service.
Buying shares in companies with crypto on their balance sheet
An even more indirect way of gaining Bitcoin exposure is through buying shares in companies that have made public their investment in the cryptocurrency.
For example, both MicroStrategy (MSTR) and Tesla (TSLA) have added billions of dollars worth of Bitcoin to their balance sheets in a vote of confidence for the future of the digital asset.
At one point, Tesla’s Elon Musk said the company would accept payment for its electric vehicles in Bitcoin, although this was halted due to concerns about the high level electricity produced using dirty fuel involved in the Bitcoin mining process.
However, Mr Musk has not ruled out once again allowing Bitcoin payments if the mining process can be adjusted to use more than 50% clean energy.
Investing in these companies also gives you exposure to their core business away from crypto.
As with any investment, it’s important that you do your due diligence and ensure you’re happy with the company you’re investing in.
Sell your Bitcoin and put the cash in your SIPP or ISA
Of course, you could always sell your crypto and add the proceeds to your SIPP, subject to the annual limit (£40,000 or 100% of your income at the time of writing), or ISA (£20,000 – 2021/22).
This comes with a few downsides though. First, any profits you make when you sell you crypto over the annual Capital Gains Tax allowance (£12,300 – 2021/22) will be taxable.
The amount you’ll pay will vary depending on your tax bracket, however there are ways of reducing or avoiding CGT.
The future of cryptocurrency and pensions
Earlier this year several pension providers began looking at Bitcoin as a potential addition to their funds and were seeking advice from investment consultants.
A surge in client inquiries regarding the ‘original’ cryptocurrency has promoted the move.
Whether this translates into greater acceptance of crypto within the mainstream financial sector remains to be seen.
But cryptocurrency is increasingly being put under the spotlight by financial institutions and governments as global uptake increases.
Adam is the founder of The Crypto Adviser which offers experts guides and reviews on all things related to Bitcoin and cryptocurrency.
Adam is Diploma for Financial Advisers (DipFA) Level 4 qualified, a Member of the London Institute of Banking and Finance (MLIBF), and has worked for many years as a journalist and PR consultant, having studied with the National Council for the Training of Journalists (NCTJ).