Thinking about investing in Cryptocurrencies?
Bitcoin, Ripple, Litecoin…
The list of cryptocurrencies goes on and on. With brand new currencies popping up almost daily, it doesn’t look like the craze is going to end anytime soon.
With stories spreading of sizeable gains and substantial losses being made relatively easily on short-term investments, it’s not surprising we’re seeing far more queries come in about this kind of investment option. We’re often asked how profits made will be taxed or whether there are tax reliefs that may be given for any losses made.
If you have specific tax related questions, please give us a call or email us to arrange a meeting.
There are also some important things to be aware of when you’re considering investing in a cryptocurrency.
You need to see cryptocurrency as physical cash
As opposed to seeing cryptocurrency in the same way that you see your bank account. What we mean by this, is that there is no ‘bank statement’ that is produced to keep track of the movements of cryptocurrency. You will need to keep your own records, to avoid any potential fines from HM Revenue & Customs (HMRC). We recommend ensuring that your records are updated every time you undertake a cryptocurrency transaction.
The records you keep will depend on your purpose
Inevitably, the next question you’re likely to ask is ‘well, what records do I need to keep?’. And this really depends on what the purpose of your involvement in cryptocurrencies is. If you’re using it for leisure, and simply spending your cryptocurrency on everyday online purchases, then there’s no need to keep any record of your transactions.
It’s when the cryptocurrency is being held as an investment and is being traded with an intention to make a profit or is being used by a business to pay for day-to-day transactions, that formal record keeping comes into play.
Are you an Investor or a Trader?
Investor:
If you’re considered to be an investor, disposals of cryptocurrencies for an individual are subject to Capital Gains Tax (CGT), not income tax. This means that for every disposal of a cryptocurrency, a CGT calculation will need to be completed and reported on a relevant tax return. You’ll need to keep track of purchase price and associated costs as well as disposal proceeds and any associated costs of sale to calculate a gain made per disposal.
You do have your Annual Exemption to offset against any gains made, which is currently £12,300, but with the rapid rise in cryptocurrencies over the past few years this may not cover all of the gains made and the excess will be charged at your appropriate rates for CGT.
Trader:
If you are trading a very high volume of cryptocurrency transactions and also approaching your trading in a certain way, you may find that you are considered a trader. If you are, and please note, HMRC may take a different view, the way in which the income is taxed is slightly different. You will still be taxed on the gains made, but your tax-free personal allowance would be offset against this (assuming you haven’t offset this against other income) and then you would pay tax and National Insurance on the profits.
What if you’re operating through a business?
If you are operating through a corporate structure such as an LLP or a limited company, any gains or losses made by the business when disposing of a cryptocurrency will be taxed as part of the profit and loss account (if the gains/losses are made during the course of the normal trade of the business. i.e. if you run a financial trader business).
If the cryptocurrency was held as an investment alongside a different trade carried out by the business, for example a firm of building contractors who invested their cash into Bitcoin, then the gains/losses made will be taxed as investment income and you won’t be able to offset any losses made against the profits from your other business.
Your crypto wallet is treated in the same way as a foreign currency bank account
Whichever way you are using the cryptocurrency, the crypto wallet in which you hold your cryptocurrency is treated in the same way as a foreign currency bank account would be for accounting purposes. The value of the crypto wallet will regularly be converted into the flat currency used by the country you’re operating in, and you may need to pay tax on any exchange gains or losses that arise as part of the conversion.
Remember, cryptocurrencies are extremely volatile
Always keep in mind that cryptocurrencies are extremely unpredictable. There were plenty of success stories recently that have now turned into stories of substantial losses as the markets come under pressure of external factors and the threat of increased regulation.
Care and consideration should be taken before investing heavily!
Always remember that despite the huge gains some have experienced recently, cryptocurrencies are still extremely volatile and lots of consideration and care should be taken before investing heavily in a cryptocurrency.
Arrange a meeting with us to discuss any queries you may have surrounding cryptocurrencies and our experts will be able to support you.
Call us on 01474 853 856 or email enquiries@a4g-llp.co.uk.
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