Investing and trading in cryptocurrency has become increasingly popular over the last few years.
However, the tax treatment of any profits made through these activities is poorly understood. Many crypto investors mistakenly believe they do not have to pay tax on any profits – this is not the case!
As there are potentially large sums of money involved, this has raised the profile of cryptocurrency investment with HMRC, who are eager to ensure that all businesses, investors and traders are paying the correct amount of tax on cryptoassets. It is important that anyone active in this sector have their tax affairs structured correctly, in a tax efficient way, whilst remaining compliant with HMRC. This will help avoid any penalties and fines.
What are cryptoassets?
A cryptoasset is an intangible digital token, which has value, or rights that can be transferred, stored or traded electronically.
There are different types of cryptoassets which work in different ways. The main types of cryptoasset include:
- Exchange tokens – these are intended to be used as payment and are also becoming increasingly popular as an investment due to potential increases in value. The most well-known token, bitcoin, is an example of an exchange token.
- Utility tokens – these provide with holder with access to particular goods or services on a platform, usually using DLT (see below). A business or group of businesses will normally issue the tokens and commit to accepting the tokens as payment for the particular goods or services in question. In addition, utility tokens may be traded on exchanges or in peer-to-peer transactions in the same way as exchange tokens.
- Security tokens – these provide the owner with particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
- Stablecoins – the premise is that these tokens minimise volatility as they may be attached to something that is considered to have a stable value such as a fiat currency (Government-backed, for example US dollars) or precious metals such as gold.
The cryptoassets are recorded through a form of Distributed Ledger Technology (DLT) often referred to as a “blockchain” and they could be subject to capital gains tax, income tax or corporation tax.
Therefore, it is important to be aware of your tax obligations for your crypto activities and you seek professional advice.
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