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Blog: What are cryptoassets and how are they taxed?

You may have heard about cryptoassets, also known as cryptocurrencies or tokens. Many think of them as a novelty, a fad that won’t last. But with the value of one Bitcoin jumping 122% from £8,544 to £35,465 in the twelve months to September 2021, it’s clear why there’s a great deal of interest in them; the chance of making a profit.

In fact, according to crypto exchange Binance, only 11% of people use them as currency; 61% of token holders seem to be more interested in making a profit, through short-term stacking, lending, or long-term holding.

This phenomenon begs the question: how will the profits generated by the exchanges of cryptoassets be taxed? Keep reading to explore.

HMRC definition

Although the use of digital assets has increased dramatically over even the last two years, there’s still no specific accounting standard for cryptoassets under international financial reporting standards. HMRC, on the other hand, has published some guidance on how they’re to be treated under UK tax law.

HMRC describes them as “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”.

More simply, they’re virtual assets that use secure technology to make it impossible to counterfeit or alter their record of ownership.

They’re strictly digital and completely decentralised, with no single bank or Government generating or keeping track of them. Instead, blockchain technology keeps a record of every single transaction using a cryptoasset, and ‘miners’ use powerful computer systems to validate the transactions, receiving newly circulated cryptoassets in return.

They get their value like any other currency – demand for the token, scarcity or the coin’s utility and advantages.

How are cryptoassets taxed?

Despite what the name may suggest, HMRC doesn’t consider cryptocurrencies as currency or money, and contrary to the way some people view them, it also doesn’t consider buying and selling them as gambling.

That means that just like any other asset, profits made from them, either for personal or business use, can be subject to tax.

For personal investors, capital gains tax (CGT) is the most likely tax to apply when selling, exchanging or giving away a cryptoasset that increased in value following its purchase. CGT is either at 10% or 20% dependent on your taxpayer rate, less deductibles.

Other taxes

If your use of cryptocurrencies counts as a ‘trade’ in HMRC’s eyes, which it could do if it fulfils one or more of the badges of trade, you might also have to pay income tax on profits made.

HMRC decides whether an activity counts as a trade based on factors like the frequency of the activity, the risks being taken and how commercial the operation is.

You may also face corporation tax and VAT bills, particularly if you provide goods and services in exchange for a cryptocurrency.

Future-proofing

Unfortunately, the way cryptoassets are taxed is usually assessed on a case-by-case basis. For this reason, the best thing you can do is ensure you keep good records, especially about trades, so you’ll be better prepared if HMRC comes knocking with questions.

You should also keep your tax advisor and accountant up to date with your usage of cryptocurrencies, and any plans to do so in the future, so they can monitor this fast-moving landscape with your best interests in mind.

For more information about the tax and accounting implications of using cryptoassets or for independent business support and advice get in touch with our expert team today.

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