Date posted: 9th Mar 2021
A recent estimate of the worldwide market value for cryptocurrencies in 2020 was US$760 billion. As of Feb 2021 Bitcoin alone reached over US$1 Trillion. That’s a lot of money for something that most of us still don’t really understand.
A cryptocurrency (or ‘crypto asset’) is a ‘digital currency’ that is encrypted making it nearly impossible to counterfeit or double-spend, but also equally untraceable. They are created digitally and traded electronically.
As with any other source of income or gains, old or new, the ‘taxman’ wants his piece of the pie.
- Gains on disposals are subject to Capital Gains Tax,
- Income Taxes can also apply on the creation & trading of crypto
- Cryptocurrencies are more like tokens of value rather than money held in a bank account
- Records of cryptocurrency transactions should be maintained
- Businesses should beware of the risks and benefits of using cryptocurrencies
HMRC do not view cryptocurrencies as money or currency, but rather as assets. They have identified 3 types of crypto assets:
- exchange tokens (can be exchanged for value or held as investments)
- utility tokens (issued by and for dedicated markets – not unlike supermarket loyalty vouchers)
- security tokens (may offer holders an interest in the debts or profits of a business)
Importantly, once they are exchanged there is no statement or record of ownership of what they were used for, which is why records need to be kept.
If a person uses cryptocurrencies to buy games or to send money overseas, these are consumer transactions and there is no obligation to keep records. However, if someone:
- buys/sells or ‘mines’ crypto assets
- sets up a business to take payment for other goods or services in a cryptocurrency
- is employed and paid in cryptocurrency
- sets up a financial trading business dealing in cryptocurrencies
then that person must keep proper records in real time and report any gains or income to HMRC.
Which taxes apply?
HMRC views most individually held crypto assets as investments. All the usual Capital Gains Tax (CGT) rules apply, and more specifically we note:
- Conversions from one crypto currency to another are treated as disposals
- Paying for a good/service with crypto also equals a disposal for CGT purposes
- The same CGT rules that apply to shares sales, also apply to crypto assets
Crypto currencies are not just bought and sold but can be generated through activities like ‘mining’ or ‘air drops’. Income Tax will be liable on the equivalent sterling value created.
If crypto receipts are employment related both income tax and national insurance (NICs) will be due on this form of non-cash payment.
Anyone who is effectively carrying on a business of dealing in crypto will have taxable trading profits treated like any other self-employment income, again attracting Income Tax and NICs.
For accounts purposes crypto is a foreign currency and fluctuations in the values or exchange rates have to be reported in line with accounting standards: Currency gains or losses made in the course of normal trading will be taxed as part of the trading profit.
If your business is using crypto it is important to be aware of the risks and benefits involved. Historically they are known for their high volatility in values, so an unexpected hit to the P&L or balance sheet could rock your business viability.
Benefits include payments that avoid charges associated with PayPal or conventional banks. Some markets only deal in crypto and it is a whole new area of business opportunity.
Just remember, as crypto payments are more like using cash, it’s vital to keep records in real time, as the transactions leave no trace.
As always, whether you are an individual or business, it is best to seek professional advice. Make sure you understand the risks and consequences of venturing into cryptocurrencies from both a financial and tax perspective. If you require our assistance with the above, please contact our tax team here.
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