Cryptocurrencies & Their True Tax Implications

I am sure, we all know that cryptocurrency is a digital or virtual currency, secured by cryptography, making it almost impossible to falsify or double-spend.

Cryptocurrencies are stored in a virtual wallet that can be accessed through an application or website; they are not managed by a bank or government.

Categories

The tax office has grouped cryptoassets into four main categories:

1. exchange tokens,

2. utility tokens,

3. security tokens, and

4. stablecoins.

Exchange tokens

Exchange tokens are intended for use as a means of payment and are also popular as an investment due to a potential increase in value. The most famous token, bitcoin, is an example of an interchangeable token.

Utility tokens

Utility tokens provide the holder with access to specific goods or services on a platform, usually through a DLT. An enterprise or group of enterprises usually issues tokens and undertakes to accept tokens as payment for a particular good or service.

Security tokens

Security tokens provide the holder with specific rights or interests in the business, such as ownership, repayment of a certain amount of money, or the right to a share in future profits.

Stablecoins

Stablecoins are another important type of crypto asset. These tokens are thought to minimize volatility as they can be tied to something that is considered a stable value, such as fiat currency (supported by the government, such as US dollars) or precious metals such as gold.

The type of tokens depends on their nature and use and not on their definition.‍

How are crypto assets taxed in the UK?

Anyone, who is a resident in the UK who holds a crypto asset will be taxed on any profits that flow from it. This tax is called Capital Gain Tax (CGT), which means that you pay tax on the difference between what your cryptocurrency cost you and how much you sold it for.

You pay CGT if your sales profits exceed the non-taxable amount, which is set at £ 12,300 in the tax year 2021/22, ie up to this amount, your profits are exempt from tax.

The purchase of cryptocurrencies alone is not a taxable event. You can buy and hold a cryptocurrency without paying any taxes, even if its value increases.

CGT is due when you get rid of tokens and make a profit. Profit, calculated in GBP, is reported to the tax office by filing a personal tax return

In certain circumstances, HMRC may consider that an individual's activities in buying and selling crypto assets constitute "trading", which is considered a form of income generation, not investment. In this case, the profit from the cryptocurrencies will be taxed as income from the trade and will be subject to Income tax rules, not CGT.

Activities such as "mining" and "staking" cryptocurrencies can potentially be subject to income tax. However, this is very rare.

Do companies pay tax on cryptocurrencies?

Just as an individuals' profits are subject to CGT or Income tax, companies are required to pay a tax on activities such as:

• Buying and selling exchange tokens.

• Exchange of tokens for other assets, including other types of crypto assets.

• Provision of goods or services in exchange for exchange tokens.

How can I prepare for the taxation of cryptoactive assets?

Cryptoactive platforms can only keep records of transactions for a short period of time, and an individual may no longer have access to this information when he or she needs to file a tax return.

Therefore, it is your responsibility to keep separate records for each transaction, including:

• type of crypto currency

• transaction date

• whether it is a purchase or a sale

• number of units

• transaction value in GBP (at the date of the transaction)

• cumulative total of investment units held

• bank statements and wallet addresses if required for verification.

HMRC may request an inspection of your records to verify that the tax return data is consistent with the platform data. As an investor, you really need to be careful because there is a risk that your profits will literally disappear over time.

It often happens that you make a profit, then a loss, but CGT is due, even though you may not have the funds to pay it. This is why it is important to financially plan for potential losses and seek advice from tax experts.

Should I invest in cryptocurrencies?

Investing in crypto assets is one way to ensure the diversity of your portfolio if you are able to assess and accept risk.

Before you begin, make sure you only use the money you can afford to lose.

And once again: consult with a tax expert first.