Cryptocurrency – visionary or scary?
Since Freedom Day back in June, we have no doubt seen more of our friends and family catching up on all the lost time. I think we’d all be very wealthy if we had a pound for every time Covid, Brexit or Bitcoin were discussed. The latter I’ll be discussing today.
Bitcoin is the largest by market capitalisation of all of the cryptocurrency. Much like the Sellotape of the sticky back plastic world or the Tupperware of plastic food containers, many will know Bitcoin but be less familiar with cryptocurrency. Overall there are around 6,000 different cryptocurrencies with the list growing daily.
You’ll have likely heard of many success stories about people doubling their money overnight as their digital currency went “to the moon” – a phrase which has become a fan favourite. But equally there will be many that have lost money if they started investing during its peak in March/April 2021 only for prices to drop in June/July 2021.
But what is it?
Cryptocurrency is a digital currency that has the capabilities to be used to buy goods and services. Cryptocurrencies work by using blockchain. Blockchain is a decentralized technology which manages transactions on its network spread across multiple computers. The records are linked together using cryptography which ensures the security of the data.
It’s much like a digital cash system but very few places currently accept it, unless you’re holidaying in El Salvador (the first country in the world to officially classify Bitcoin as legal currency).
Unstable/volatile currency
This is the attraction for investors as this volatility is where gains can be made, either by quick short-term trading and by holding for the long-term gain.
“I’ve made money by selling: How is it taxed?”
This will depend on whether you owned the crypto personally or through a company. I suspect in a large majority of cases a small amount of personal funds have been ‘gambled’ on the crypto market rather than an SME using company money as an investment strategy. We will discuss both below:
Individual: Whilst there are exceptions, individuals who own cryptocurrencies as personal investments will be subject to capital gains tax when they dispose of the assets. Key exceptions include trading (high volume, organized and sophisticated buying and selling only), earnings from employment and mining transactions. A record of the cost and date of all purchases of cryptocurrency should be kept.
The gain or loss made from each sale of cryptoassets should then be entered on to your personal tax return. All individuals are entitled to an annual capital gains tax exemption of £12,300 in 2021/22. Ordinarily total gains made under £12,300 would not require a tax return, but the way HMRC calculate the base cost for the disposal of cryptoassets may make your gain higher than you expect so please be cautious about not disclosing gains to HMRC. Fines will be issued if tax is underpaid.
Gains made over the annual exempt amount will be taxed at 10% for gains within the basic rate tax threshold and 20% above this. Losses made can be carried forward and used against future capital gains.
Company: Similarly to individuals, as long as it does not become a trade, the disposal of cryptoassets will be recorded as a chargeable gain or capital loss. The chargeable gains are then subject to corporation tax. Capital losses cannot be offset against trading income and will be carried forward until a chargeable gain is made in the future.
Whether you invest or avoid is a personal decision but those investing will need to consider all of the above when making their disposal.
If you would like to discuss the tax implications of such investments or any other matters please give us a call on 01233 223763.